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April 28, 2021

Trading the Q1 2021 U.S. Advance GDP Release

 Dollar traders are in for a couple of busy trading sessions because coming in less than a day after the FOMC statement is our first look at the U.S. economic recovery for 2021.

What are markets expecting from the release? More importantly, how will the report affect the dollar’s prices?

Here are points you need to know if trading the event on Thursday at 12:30 pm GMT.

What is this report all about?

A gross domestic product (GDP) report is basically an economic report card. This figure sums up the country’s performance in terms of trade, consumer activity, government spending and investment for a particular period.

In Uncle Sam’s case, the GDP is printed on a quarterly basis in three versions: advance, preliminary, and final. Being the first among these releases, the advance version tends to be the most exciting one to watch and trade.

What happened last time?

  • U.S. economy grew by 4.0% in Q4 2020 vs. 4.2% expected
  • Annualized growth came in at -3.5%, the first decline since 2009
  • Q3 2020 growth revised higher from 33.1% to 33.4%

Uncle Sam grew by 4.0% in the last quarter of 2020 after jumping by 33.4% in Q3. That wasn’t too bad considering that lockdown restrictions were reintroduced in some key cities in November and December.

The 3.5% annual decline gave the bulls a bad moment because it marked the first decline since 2009 and the sharpest fall since 1946. Traders weren’t too worried though because post-stimmy checks consumer activity and the pace of vaccination hinted at a strong recovery in 2021.

Markets quickly got over the U.S. GDP release and instead priced in brokers taking steps to control short squeezes triggered by speculators and our dudes in /WallStreetBets.

The “back to regular programming” vibes encouraged risk-taking and dragged the safe-haven dollar across the board.

What’s expected for the upcoming release?

  • Growth likely sped up from 4.3% to 6.3%
  • January stimulus checks boosted consumer activity
  • The economy may be on track to surpass pre-COVID levels in 2021

In a nutshell, increased vaccinations, easing lockdown restrictions, and the stimulus checks distributed in January are expected to have boosted Uncle Sam’s growth in Q1 2021.

The combination of higher prices, more businesses reopening, better weather in March, and vaccinated consumers partying like there’s no tomorrow likely propelled consumer spending – which makes up more than half of the U.S. GDP – to notable highs.

Meanwhile, businesses are struggling to keep up with demand. Increased optimism and easing restrictions have lifted demand high enough that manufacturers and service providers are experiencing more backlogs, higher input costs, longer lead times, and labor shortages. Not exactly bad problems to have, no?

How can you trade the event?

Since the last advance GDP release, the dollar has only gained value against its fellow safe-havens. That is, it has lost pips against “riskier” bets like the comdolls.

If FOMC members surprise the markets with hints of tapering or tightening, or if this week’s GDP release highlights the faster pace of Uncle Sam’s recovery compared to the other major economies, then we could see the dollar make new weekly highs against its counterparts.

But if the strong GDP numbers encourage risk-taking, then the dollar could take more hits against the higher-yielding bets.