Dollar Rebounds as GDP Revised Higher; PCE to Decide Fed Path

The U.S. Bureau of Economic Analysis released its third (final) estimate for Q2 2025, showing GDP grew at an annualized 3.8 % — an upward revision from prior estimates of 3.3 %.

This gain was driven mostly by stronger-than-expected consumer spending, as well as a sharper reduction in imports (which subtract from GDP). Real final sales to private domestic purchasers (i.e. excluding inventories) were also revised upward to 2.9 %, indicating underlying demand remained resilient.

On first glance, this may appear as a signal that the economy is running hotter than some expected — potentially complicating the Fed’s path toward further easing.

Implication for Fed Cut Expectations

The stronger GDP figure pushed back the market expectation for aggressive rate cuts, leading to the surge in US Dollar on Thursday. With growth remains robust, it gives the Fed less cover to ease quickly without stoking inflation risks. Markets seem temper expectations of deep cuts in upcoming meetings.

Still, even with the strong GDP print, the Fed is likely to lean even more on forward data — inflation, labor, PCE — to justify each move. The “data-dependent” mantra now carries more weight in guiding market expectations.

The US treasury yields, especially the shorter maturities, surged as market adjust the probabilities of the cuts downward.

U.S. Dollar Reaction & FX Market

The stronger-than-expected GDP print has provided the U.S. dollar with renewed support, as investors scaled back the probability of aggressive near-term rate cuts.

The greenback may continue to benefit in the short run, though the reaction could remain limited if markets view the GDP surge as partly mechanical — driven by import swings rather than a sustained pickup in domestic activity.

USDX, Day Chart | Source: Ultima Market MT5

From a technical perspective, the dollar has regained momentum, with the DXY reclaiming the 98 level and returning to its key consolidation band between 97.5 and 98.5. This range has acted as a pivotal zone around the dollar’s multi-year low, and the rebound suggests underlying support remains intact.

Overall, the GDP revision strengthens the dollar’s case, particularly if upcoming inflation data confirms sticky price pressures. However, the narrative could quickly shift if inflation cools, as softer data would revive expectations for further Fed easing and weigh on the greenback.

What’s Next: PCE Price Index Takes Center Stage

Looking ahead, all eyes will turn to the PCE Price Index — the Fed’s preferred inflation gauge — set for release soon.

• If PCE prints hotter than expected, it could reinforce concerns that inflation remains sticky, delaying further rate cuts or even prompting a hesitation.
• A softer PCE, especially core (excluding food & energy), could revive confidence in additional easing and weaken the dollar again.
• The market will also compare PCE results versus CPI prints, checking whether core inflation is trending downward or holding firm.

In short: the GDP surprise shifts the burden to inflation data. PCE is now the prime battleground — it may decide whether the Fed leans dovish or stands pat.

Disclaimer

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