Spotlight on US GDP Growth Rate, BoJ Interest Rate Decision

The last two days of the trading week will spotlight an advance reading of third-quarter economic growth in the US and the Bank of Japan’s (BoJ) interest rate decision.

The market anticipates Gross Domestic Product (GDP) for the US to be at the level of 2.4 percent in the third quarter compared with minus 0.6 percent in the second quarter. The US Dollar’s strength may be undermined if the actual result released on Thursday is lower than expected and this might be the case given the overall trends of high inflation and rising interest rates weighing on investor confidence.

On the other hand, the labour market in the US remains relatively strong, supporting the scenario of the US economy exiting the technical recession seen in the first half of the year. Recent strength in the financial sector was shown in earnings reports from large-cap companies and this could contribute to overall GDP growth as the banking sector gains from increasing interest rate income.

On Friday, the BoJ will announce its interest rate guidance which is expected to remain unchanged at the level of minus 0.1 percent. There are several challenges to the BoJ’s dovish stance, starting with the Yen’s vulnerability to a strong US Dollar prompting the central bank to intervene in order to shore up the JPY’s value.

Another challenge is rising inflation in Japan which has not reached the double digits seen in Europe and the UK but is nonetheless trending upwards at 3 percent. If there are signals of a change in stance in the BoJ’s monetary statement, there could be a knock-on effect on the Yen currency crosses.

A further challenge for Japan’s monetary policy makers is rising inflation in major trading partners which is pushing up import prices. Japan is Australia’s second-largest trading partner, for example. Australia reported higher-than-expected inflation of 7.3 percent in the third quarter versus 6.1 percent in Q2. This trend is likely to continue to be a driver of inflation in Japan given that manufacturers and mining exporters tend to pass on higher costs to their customers.

Finally, the EU’s largest economy, Germany, will release its flash third-quarter GDP growth rate on Friday. On a quarterly basis, GDP is expected to have declined to minus 0.2 percent in Q3 from 0.1 percent in the second quarter. On a yearly basis, GDP is seen as declining from 1.7 percent in Q3 of last year to 0.8 percent in the same period of this year.

Germany’s preliminary annual inflation rate for October is also due to be released on Friday and is expected to have risen to 10.1 percent from 10 percent in September. Anything unexpected in the final GDP and inflation figures might have an impact on the EUR currency crosses.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.