09:46 AM EDT, 04/25/2024 (MT Newswires) -- The dollar reversed earlier losses against most major currencies in North American trade on Thursday after US GDP missed expectations and other data warned of upside risks to this Friday's reading of the Federal Reserve's preferred measure of inflation.

US economic growth moderated markedly in the first quarter when GDP rose at an annualized pace of 1.6%, down from 3.4% previously and below a consensus that had looked for a 2.5% increase.

Falling private inventory investment and rising imports were the main headwinds for economic growth during the period, the Bureau of Economic Analysis said, although the slowdown in overall economic growth also reflected a more modest pace of increase for consumer spending, exports and government expenditure at both state and federal levels.

"Altogether, net exports subtracted nearly 0.9% points from GDP growth, with inventories generating an additional drag of nearly 0.4% points," said Paul Ashworth, chief North American economist at Capital Economics.

US dollar pairs rose widely following the release, with the Swedish krona and Japanese yen bearing the brunt of the rally to become the biggest decliners in the G10 basket, while British pound sterling was the only major currency to cling to modest earlier gains.

However, the dollar gains could have had more to do with Thursday's Core PCE Price Index deflator, which suggested that market expectations for Friday's reading of the Core PCE inflation inflation rate are too low.

The Core PCE Prices Index rose 3.7% in the first quarter, up from 2% previously and ahead of a consensus that had looked for a 3.4% reading. This suggests upside risk to the consensus for Friday's reading of the Core PCE Inflation rate.

"A 3.42% release for today's first quarter data would imply a 0.3% MoM release for tomorrow's March data," said Chris Turner, regional head of research for UK & CEE at ING, in a Thursday note to clients. "Equally, a 3.55% release would imply quite a bad 0.4% MoM figure and probably trigger more bearish flattening of the US yield curve and dollar strength."

Consensus currently expects Friday's Core PCE Price index to remain around 0.3% in month-on-month terms, and for it to tick lower to 2.6% from 2.8% in annualized terms. However, estimates from ING Group suggest the monthly number is now likely to come in north of 0.4%, which could be enough to lift the annual pace of core PCE inflation for March.

Any such outcome would likely see the market further reduce expectations for interest rate cuts from the Federal Reserve this year. Yields implied by Federal Funds futures already shifted higher on Thursday, with the June contract rising by 1 basis point to 5.31% while the December contract added 10 basis points to reach 5.05%

"Recent inflation data has not given the Fed the confidence it desires to begin its easing cycle" said Michael Gapen, chief US economist at BofA Global Research. "While the Fed can dismiss some of the recent firmness as noise, it will take on board some signal and conclude disinflation is proceeding at a slower pace. We think a June rate cut is off the table and have shifted the first cut to December,

So far in 2024, the Core PCE Price Index inflation rate has continued to edge lower, falling to 2.8% in February from 2.9% in January and December, though increases in the month-on-month measure have led the market to worry about the prospect of the annualized Core PCE inflation rate remaining at a level that is above the Fed's 2% target over the coming months.

Fed Chairman Jerome Powell told the Wilson Center Washington Forum last week that recent data has not given the central bank greater confidence that inflation is on course for a sustainable return to the 2% target and has instead indicated that it will take longer than previously thought for policymakers to be able to have that confidence.