The Latest Us Inflation Report Is a Blow to the US Dollar
On Thursday, the US dollar dropped against every major currency except the yen and the euro.
The US inflation report was the dollar’s worst nightmare once again. Following expectations, December’s headline and core CPI index fell to 6.5% and 5.7% year over year, from 7.1% and 6.0%, respectively. The monthly reading, however, was a pleasant surprise, and it’s possible that this is what motivated traders to increase their short bets on the dollar.
Consumer prices fell 0.1% month-over-month rather than remaining flat as was predicted, lending validity to the idea that inflation may be on a protracted downward trend. Despite some officials emphasizing the need for more tightening after the data came out, investors may now be more convinced that the Fed will finally need to drop rates at some time this year.
Fed funds futures indicate that market players expect a final rate of roughly 4.9% and have priced in a 90% possibility of a 25bps raise at the forthcoming meeting. However, they still see a 50 bps rate cut by the end of the year as the most critical factor.
JGB Rates Shatter Cap, Yen Rises Most, Euro Second
The dollar/yen dropped more than 3% yesterday and today in Asia, confirming a lower bottom on the daily chart and making the yen the greatest gainer among major currencies. The recent decline in US inflation lends credence to the idea that the BoJ may be commencing its tightening campaign when the Fed is exiting after news yesterday that BoJ policymakers may continue with extra measures to rectify distortions in the yield curve.
The shrinking yield gap between the US and Japan indicates this trend. In today’s Asian trade, the yield on the 10-year Treasury note fell to 3.45% from 3.553%, while the yield on the 10-year government bond in Japan surpassed its new ceiling of 0.50%. Therefore, the dollar/yen may continue its downward trend if the yield disparity between the US and Japan decreases.
The euro fell because investors feared the European Central Bank would need to tighten monetary policy faster than the Federal Reserve in the future because of rising underlying price pressures in the Eurozone. The euro/dollar pair broke beyond the psychologically significant level of 1.0800, which might spur the bulls to push the pair to a new high above the March 31st peak of 1.1175.
The Stock Market Reacts Well to the CPI Report, but Attention Is Shifting to Profits
The US inflation figures also affected the stock market, helping European and American indexes increase their previous gains. As the yen and JGB rates rose substantially, the Nikkei 225 in Japan was the only major index to fall today.
If economic data points to deeper wounds, Americans may not have much to celebrate about the possibility of lower interest rates in the United States. Indeed, a sluggish economy is terrible for businesses and their bottom lines.
Today marks the start of earnings season, as many major US banks release their numbers. For the first time since 2020, fourth-quarter S&P 500 profits are predicted to fall year over year. An S&P 500 relief bounce is possible if the statistics come in somewhat better than predicted. Still, an overall bad picture leaves the door open for another drop.
Strong resistance for the S&P 500 may be found around the downtrend line formed from the top on January 4, 2022, or at the crucial zone of 4,155. For the downtrend to be confirmed, there has to be a drop from one of those ranges followed by a break below 3,900.
Gold’s rise of over $1,880 may be attributed to a weaker dollar and lower Treasury rates. Suppose investors start to worry more about the state of the global economy. In that case, gold’s price might rise further, potentially approaching the round figure of $2,000, close to its top on April 18.
Featured Image: Pexels @ Yan Krukau