Economic Data Adds to Rate Uncertainty

The dollar initially gained on robust private payroll data, with ADP reporting an unexpected surge in October hiring, despite potential disruptions from strikes and hurricanes.

The dollar index rose on Thursday, recovering from a seven-month low hit in the previous session, as robust U.S. private payroll data and sticky inflation readings countered weaker-than-expected third-quarter GDP growth.

The dollar index, which measures the greenback against a basket of major currencies, gained 0.2%, recovering some ground after falling to a low of 102.78 on Wednesday, its weakest level since April 2023.

At last check in New York, the dollar index was up 0.18% at 103.33.

The dollar initially gained after ADP reported a strong increase in October private payrolls, countering expectations of a slowdown.

The dollar briefly extended gains after data showed that U.S. third-quarter gross domestic product increased at a solid 2.8% annualized rate, though weaker than the 3% economists had anticipated.

The dollar gave up some ground after the GDP reading, with traders now awaiting Thursday's personal consumption expenditures price index data for further cues on the Federal Reserve's rate path.

"This data adds to the evidence that the U.S. is still on course for a 'soft landing' as growth remains resilient, helped by strength in consumer spending, business investment, and net exports," said Michael Brown, senior markets analyst at online broker Pepperstone in Melbourne.

"Still to come this week are PCE inflation figures, which will provide the final piece of the puzzle and could influence traders' outlook for the Fed's terminal rate and the timing of rate cuts.”

Traders are pricing in a 63% probability of a 50-basis-point increase by the Fed at its December meeting and see the terminal rate reaching a peak of around 4.89% by mid-2024.

Among other currencies, the British pound fell 0.42% to $1.2961, after hitting a nine-day high earlier in the session.

U.K. Chancellor of the Exchequer Rachel Reeves unveiled the Labour government's first budget on Wednesday, prioritizing fiscal discipline and stability in public finances.

The budget aims to maintain investor confidence, particularly after the market turmoil sparked by former Prime Minister Liz Truss' tax-cutting policies in 2022.

"For Chancellor Reeves, PM Starmer, gilts, the pound, and the entire U.K. economy, there is a huge amount resting on this budget," said Jane Foley, head of FX strategy at Rabobank.

"The pullback in U.K. bond yields gathered pace as the government's cautious fiscal approach unfolded, putting some pressure on sterling."

The euro was flat at $1.0814, as traders digested stronger-than-expected German growth and inflation readings.

German factory orders and industrial output both rose in September, while consumer prices increased by 11.6% year-over-year in October, above expectations.

The euro initially gained on the German data, which reduced the likelihood of a substantial rate cut by the European Central Bank in December.

However, the dollar's strength in the second half of the session and weaker-than-expected U.S. GDP growth limited further gains in the euro.

Third-quarter eurozone GDP growth came in at 0.4% quarter-on-quarter, which was slightly higher than anticipated and provided some initial support for the euro.