Inflation Data Sharply Strengthens the US Dollar

Data on consumer prices and core inflation published yesterday exceeded expectations. According to ForexFactory:

→ Core CPI in monthly terms: actual = 0.4%, expected = 0.3%, a month ago = 0.4%;
→ CPI in annual terms: actual = 3.5%, forecast was = 3.4%, previous value = 3.2% with a target value of 2%.

As a result of the publication of news, market participants' expectations that the Federal Reserve will leave rates unchanged in June have sharply increased. According to the CME FedWatch Tool, before the publication of news about inflation, the probability of this was = 42.6% (that is, the majority believed that there would be a rate cut), then after the publication the probability = 83.0%. This is a dramatic change in sentiment.

Speaking to Bloomberg, former US Treasury Secretary Larry Summers said cutting rates in June would be a dangerous and egregious mistake, adding: "You have to take seriously the possibility that the next rate move will be upwards rather than downward." .

The reaction of financial markets was the strengthening of the US dollar in the context of tight monetary policy, the effect of which will last longer:
→ USD has risen in price in currency pairs — for example, USD/CHF has risen to its maximum in six months;
→ Bitcoin fell in price, but this morning the main cryptocurrency has already recovered from yesterday’s fall;
→ gold tested support at 2,320.

Stock markets have also come under pressure. Technical analysis of the Nasdaq-100 chart shows that:
→ the price is moving along an upward trajectory (shown by blue lines), but its rounding indicates that the forces of demand (which were largely based on expectations of lower interest rates) are being exhausted;
→ also the weakness of demand is indicated by the fact that the NASDAQ price cannot overcome the resistance of 18,400 to reach the upper blue line;
→ as a result of yesterday's news, the index dropped to the lower blue line, which acts as support.

It is possible that in the near future the market will be in consolidation between the levels of 17,800 and 18,400, shifting the focus to the beginning of the reporting season of companies for the first quarter of 2024.

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