The US dollar begins the new week amid inflation. The latest Fed report has shed light on the current puzzle facing investors when it comes to comprehending US monetary policy and its impact on inflation. The report shows that no US Fed policymaker anticipates a reasonable rate cut for 2023, despite market expectations of two cuts at the beginning of the year. As such, there is a clear disconnect between what markets are expecting and what policymakers currently believe is best for economic growth.
As a result of this divergence in opinion, inflation forecasts for 2023 have been revised downward from 7.1% to 6.9%. This drop in expected inflation can be attributed largely to an increase in uncertainty surrounding future interest rates. Worries about global trade tensions also weigh heavily on investor sentiment around the world.
The Consumer Price Index Falls
Last week’s labor data was encouraging, with jobless claims falling to 203K and ADP employment increasing by 236K. This suggests that the US labor market is continuing to improve at its current pace. However, this news has implications for inflation as well.
The Federal Reserve has taken some comfort from recent declines in the CPI (Consumer Price Index), but a major surprise on the upside could change their stance on interest rates and force them to rethink their “no rate cut in 2023” portrayal.
It remains unclear how this will affect monetary policy going forward; however, it does suggest that any sudden rise in prices could cause concern among policymakers at the Fed. They may be forced into action if they feel there is an imminent threat of runaway inflation due to strong economic growth. Especially when combined with historically low-interest rates for an extended period.
The US index is likely to react positively to the news that inflation in the US is expected to drop from 7% in 2023 to 6.8%. A vital report above 7.2% will signal that there may be more room for rate hikes by the Federal Reserve (Fed). This could lead day traders into USD strength and EURUSD weakness as an instant reaction if this surprise materializes next week.
Note: Forexschoolonline.com is not a financial advisor. Do your research before investing your funds in any financial asset or presented product or event. We are not responsible for your investing results.