FX Focus: Dollar struggles for direction as US economy slowed sharply at the end of 2016

The dollar struggled for direction on Friday (27 January), after data showed the US economy slowed down more than expected in the final three months of 2016.

Shortly after 1.30pm GMT, the greenback, which has fluctuated throughout the week in line with political developments, was 0.1% lower against the euro, buying 0.9351 euro cents, but gained 0.37% against the yen, trading at ¥114.95.

The US currency was 0.11% against its Canadian counterpart, fetching CAD$1.3104, but declined 0.19% against the Australian dollar to AUD$1.3254 and was largely flat against the Swiss franc.

Naeem Aslam, chief market analyst at Think Markets UK, said the GDP data brought an end to the good news for US President Donald Trump.

"The massive rally in the dollar which we have experienced since last year will be a major focus. However, traders would like to see more than one economic number to see a trend before they change their stance," he said.

"They are not just ready to form a bearish opinion for the dollar because the US Federal Reserve still wants to increase the interest rate."

Official figures showed the world's largest economy grew 1.9% in the fourth quarter of 2016, slowing sharply from the 3.5% expansion recorded in the previous quarter and falling short of analysts' expectations for a 2.2% reading.

On a 12-month basis, the US economy grew 1.9%, down from the 2.5% rate recorded in 2015 and below the historical average of 3.3%.

Meanwhile, the pound was on the back foot as traders cashed in profits after sterling hit two six-week highs in as many days earlier this week.

Sterling hit $1.2672 on Thursday, the highest level against the dollar since 12 December, but retreated markedly in the final session of the week and, by early afternoon, it was trading lower against the dollar and the euro.

The UK currency was down 0.39% against the former, trading at $1.2537, and fell 0.33% against the latter, exchanging hands at €1.1739.

"It has become very clear that the Brexit developments continue to dictate where the sterling trades with uncertainty to likely limit upside gains," said FXTM research analyst Lukman Otunuga.

"Sentiment remains firmly bearish towards the pound with sellers potentially exploiting any further uncertainty or even a resurgent dollar to drag the pound/dollar lower."