The US currency has regained confidence, backed by strong US macroeconomic data. Meanwhile, the situation in the eurozone is not that positive. The fact is that the ECB meeting failed to support the single currency. Still, the euro hopes to outpace the dollar, which has regained momentum and is set to reach new highs.

On Friday, October 27th, the greenback showed a significant rise amid solid US economic growth data. Analysts believe these reports have boosted the likelihood of a longer-term Federal Reserve interest rate hike.

According to the US Bureau of Economic Analysis (BEA), the US real GDP for the third quarter of 2023 grew more than expected. This growth rate followed a 2.1% increase recorded in the second quarter of the year and surpassed economists' expectations of 4.2%. Analysts from Commerzbank think these growth figures might guide the Federal Reserve's next steps regarding rates.

Experts at Commerzbank expect the regulator to keep the key rate unchanged. However, it is necessary that economic growth slow down soon. This would reduce consumer demand pressure. If data in the coming weeks shows renewed strong growth in the fourth quarter of 2023, there is a high chance of a rate hike in December.

In the third quarter of this year, the US economy expanded at its fastest pace in two years. Wage increases, driven by a tight labor market, boosted consumer spending. The latest reports have shown that the US economy is not threatened by the recession, a topic that dominated discussions throughout 2022 and early this year.

According to the US Department of Commerce, the US GDP advanced by 4.9% annually in the third quarter of 2023. This marked the highest growth rate since the fourth quarter of 2021. Economists had anticipated a rise of only 4.3% annually.

"The increase in real GDP reflected increases in consumer spending, private inventory investment, exports, state and local government spending, federal government spending, and residential fixed investment that were partly offset by a decrease in nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased," the US Bureau of Economic Analysis (BEA) said.

Earlier this week, reports on business activity highlighted the strength of the US economy compared to the UK and the European Union. According to Brian Rose, an economist at UBS, the robust US GDP growth figures reflect the tension between strong economic data and the prospects of maintaining high interest rates. This encourages the Federal Reserve to implement tighter policies, making investors wary. Rose concluded that traders needed evidence that the economy was cooling down and not collapsing and that the shocks related to interest rates had ended.

In addition, on Thursday, October 26, the European Central Bank (ECB) held a meeting and decided to keep interest rates unchanged. As expected, the ECB ended its series of rate hikes, emphasizing that talks of further cuts are premature. "The statement is very similar to the one in September. Obviously, they had to acknowledge the fact that inflation dropped, which was also what they expected, but ultimately, they are still trying to hang on to some sort of hawkish bias saying that inflation remains too high," Francesco Pesole, FX strategist at ING, said.

After the ECB's October meeting, the interest rates for main refinancing operations, marginal lending, and deposits remained at 4.50%, 4.75%, and 4.00%, respectively. The ECB representatives said in their statement that keeping rates at these levels for a long time would contribute significantly to achieving the 2% inflation target.

Against this backdrop, the EUR/USD pair experienced modest bearish pressure. Following statements from ECB officials, the pair traded in negative territory. On Friday morning, October 27, the EUR/USD pair hovered around 1.0556, looking for opportunities to climb higher.

The European regulator's decision was in line with market expectations. Investors then turned their attention to US data, where signs of moderate inflation and steady economic growth contributed to a decrease in US bond yields and the dollar's value. According to analysts at TD Securities, a stable US economy combined with a "soft landing" scenario, often mentioned by experts, could lead to increased risk appetite and a weakening dollar. Yet, for now, the USD is strong and seems unbothered by potential pitfalls.

Some analysts believe that betting against the dollar is a waste of time since the currency is benefiting from the strength of the national economy and positive macroeconomic reports. Experts note the consistent lead of the US economy compared to others. The latest strong US GDP data supports this view. Analysts believe that the US economy is still resilient, and further tightening of monetary policy is needed to cool consumer demand. The US dollar will rise until the economic situation changes.