On Wednesday, the stock market witnessed a significant rebound, with the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average posting notable gains, driven in part by Lyft’s shares soaring 35% after reporting impressive fourth-quarter earnings. This rally followed a sharp downturn on Tuesday, spurred by concerns over inflation and the Federal Reserve’s interest rate policies. The market’s recovery was also reflected in the currency markets, where the dollar index dipped slightly, and currency pairs like EUR/USD saw modest gains. These movements came in the wake of comments from Federal Reserve officials and the latest CPI data, which led to a recalibration of expectations regarding the timing of potential rate cuts, now more likely in the second half of 2024, and influenced currency market dynamics significantly.

Stock Market Updates

On Wednesday, the stock market saw a positive shift as major indexes rebounded from the significant losses experienced in the prior session. The S&P 500 increased by 0.96% to close at 5,000.62, the Nasdaq Composite rose by 1.3% to end at 15,859.15, and the Dow Jones Industrial Average grew by 0.4%, adding 151.52 points to finish at 38,424.27. This recovery was notably led by shares of Lyft, which surged by 35% following the ride-hailing company’s announcement of better-than-expected earnings for the fourth quarter. However, not all shares experienced gains, as Airbnb’s stock fell by 1.7% despite the company surpassing revenue expectations in its latest quarter.

The upward movement in the stock market came after a tumultuous Tuesday, where indexes such as the Dow, S&P 500, and Nasdaq Composite all slumped by more than 1%, marking the Dow’s worst day since March 2023. This sell-off was triggered by a hotter-than-anticipated inflation report, causing concern among traders that the Federal Reserve might delay cutting interest rates, a move previously anticipated by some to occur as early as March. The January CPI report has adjusted expectations, suggesting that any potential rate cuts by the Fed are more likely to happen in the second half of 2024, reflecting investors’ recalibrated outlooks on monetary policy amidst ongoing inflation concerns.

Data by Bloomberg

On Wednesday, the stock market experienced broad gains across most sectors, with the overall sectors index rising by 0.96%. Industrials led the charge with a significant increase of 1.67%, followed closely by Communication Services and Information Technology, which saw gains of 1.42% and 1.10%, respectively. Other sectors showing notable performance included Consumer Discretionary, Financials, and Health Care, with increases of 1.02%, 0.96%, and 0.81%, respectively. Real Estate, Materials, and Utilities also experienced positive movement, albeit at a slower pace. In contrast, the Energy and Consumer Staples sectors faced slight declines, dropping by 0.17% and 0.19%, respectively, indicating a mixed but predominantly positive day in the market.

Currency Market Updates

The currency market experienced notable movements as the dollar index saw a decrease of 0.25%, influenced by a mix of factors including the consolidation of gains post-Tuesday’s Consumer Price Index (CPI) announcement and remarks from Chicago Fed President Austan Goolsbee, who suggested that the market’s reaction to the inflation data might have been excessive. Goolsbee’s comments, emphasizing that the recent CPI report does not alter the ongoing downtrend in inflation, were particularly impactful despite the core CPI’s 3-month annualized rate climbing to its highest since June. This dovish perspective from Goolsbee, alongside a drop in Treasury yields, led to a shift in market expectations, increasing the probability of a Federal Reserve rate cut in May and adjusting the outlook for 2024 cuts.

In currency pairs, the EUR/USD pair experienced a slight recovery, rising 0.2% after initially dropping below 1.0700, reacting to the surging U.S. Treasury yields and the recalibration of Federal Reserve rate cut expectations following the U.S. CPI data. This movement underscores the sensitivity of currency markets to interest rate expectations and inflation data, with the euro finding some support despite facing pressure from the anticipated earlier and more significant rate cuts by the European Central Bank compared to the Fed. Meanwhile, other major currencies like the British pound and the Japanese yen also showed varied reactions to the shifting economic indicators and central bank sentiments, highlighting the intricate dynamics influencing the currency markets amidst evolving economic landscapes.

Picks of the Day Analysis

EUR/USD (4 Hours)

EUR/USD Rebounds Amid USD Pullback and Fed Rate Cut Speculation

The EUR/USD pair witnessed a rebound as the US dollar experienced a modest retracement, driven by a pullback in US yields and profit-taking after recent gains. This movement was influenced by the anticipation of potential Federal Reserve monetary easing, possibly starting in June, in response to higher-than-expected US inflation figures. Market odds, according to the CME Group’s FedWatch Tool, suggest a growing probability of a Fed rate cut, with significant expectations for a reduction by the June meeting. Meanwhile, Federal Reserve and ECB officials highlighted the importance of cautious monetary policy adjustments amidst inflation concerns and geopolitical risks, indicating a complex environment for future rate decisions and their implications for currency movements.

Chart EUR/USD by TradingView

On Wednesday, the EUR/USD moved higher and reached near the middle band of the Bollinger Bands. Currently, the price is moving just below the middle band, suggesting a potential slightly upward movement to reach above the middle band. Notably, the Relative Strength Index (RSI) maintains its position at 44, signaling a neutral outlook for this currency pair.

Resistance: 1.0744, 1.0796

Support: 1.0713, 1.0662

XAU/USD (4 Hours)

XAU/USD Recovery Amid Weakening USD and Optimistic Market Sentiments

Gold (XAU/USD) witnessed a dip to its lowest since last December at $1,984.03, only to rebound above the $1,900 threshold as the US Dollar weakened due to improved market sentiments and a rally on Wall Street. This shift came despite the global central banks’ firm stance against easing monetary policy, underscored by recent macroeconomic data indicating persistent inflation and tight labor markets, especially in the US. The unexpected rise in January’s inflation and strong Nonfarm Payrolls report has quashed immediate hopes for a Federal Reserve rate cut, as affirmed by Fed Chairman Jerome Powell, emphasizing a cautious yet optimistic outlook for the economy.

Chart XAU/USD by TradingView

On Wednesday, XAU/USD moved flat and moved between the lower and middle bands of the Bollinger Bands. Currently, the price is moving above the lower band, suggesting a potential upward movement to reach the middle band. The Relative Strength Index (RSI) stands at 32, signaling a bearish outlook for this pair.

Resistance: $2,004, $2,023

Support: $1,988, $1,973

Economic Data

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CURRENCIES:

Gold Price Analysis Following US CPI Data

• Gold prices dropped to a two-month low after US CPI data indicated higher inflation than expected, influencing a hawkish view on Federal Reserve interest rate decisions.
• This inflation report led to higher U.S. Treasury yields and strengthened the U.S. dollar, negatively impacting gold prices.
• If inflation doesn’t decrease, the Fed might postpone interest rate cuts, potentially keeping bond yields and the U.S. dollar high for an extended period, further pressuring gold.

Technical Outlook for Gold

• After breaking below $2,005, gold targeted the 50-day simple moving average around $1,990.
• A further decline could see gold heading towards $1,975, with $1,965 as the next significant level to watch.
• Conversely, a price recovery seems unlikely without positive drivers, but if it occurs, resistance is expected near $2,005 and then around the 50-day simple moving average at $2,030.

STOCK MARKET:

Fed’s Response to Inflation Data in 2024

• The recent hot inflation report supports the Federal Reserve’s cautious stance on rate cuts, with officials signaling a need for more time.
• Market expectations have adjusted, now anticipating a nearly 80% chance of a rate cut by June, a delay from earlier predictions of a May start.

Inflation Metrics Exceed Expectations

Fed Officials and Market Reactions

• Fed Chair Jay Powell emphasized the need for continued good data before adjusting monetary policy, indicating a cautious approach to rate cuts.
• Other Fed officials, including those from the Richmond, Boston, and Cleveland Fed, echoed the sentiment for patience, aligning with Powell’s cautious outlook.

Inflation Data’s Impact on Fed Policy

• Despite some positive inflation trends, the Fed is waiting for a full year of data showing a move towards the 2% target, likely marking June as a critical month.
• Investors had initially hoped for an aggressive Fed response with rate cuts as early as March, but recent statements and data have tempered those expectations.

Political and Economic Implications

• The Fed’s cautious stance places it at the center of potential political controversy, especially in an election year, with figures from both political sides ready to critique the timing of rate cuts.
• The focus on shelter prices and services excluding shelter indicates areas of persistent inflation, with the Fed’s preferred inflation measure, the “core” Personal Consumption Expenditures index, showing more improvement in December than CPI.
• The Bureau of Labor Statistics reported a 0.3% monthly and 3.1% annual rise in the Consumer Price Index (CPI) for January, exceeding forecasts.
• Core inflation, excluding food and gas, also rose more than expected, at 0.4% monthly and 3.9% annually, doubling the Fed’s 2% target.

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On Tuesday, stock markets faced a sharp decline following unexpectedly high January inflation data, which sent Treasury yields climbing and dampened hopes for multiple Federal Reserve rate cuts this year. The Dow Jones Industrial Average recorded its worst session since March 2023, plummeting by 1.35%, while the S&P 500 and Nasdaq Composite also saw significant drops. This inflation surprise, indicated by a higher Consumer Price Index (CPI) rise than forecasted, rattled investors, leading to steep losses in tech giants like Microsoft and Amazon. Meanwhile, currency markets adjusted to the new data, with the dollar strengthening and shifts in expectations for the Fed’s monetary policy. The inflation report underscores ongoing inflationary pressures, despite a slight year-over-year decrease, challenging the outlook for interest rate adjustments and impacting global financial markets.

Stock Market Updates

Stock markets experienced a significant downturn on Tuesday, triggered by January’s inflation data, which came in hotter than anticipated. This unexpected rise in inflation heightened Treasury yields and cast doubt on the Federal Reserve’s ability to implement multiple rate cuts throughout the year. This prospect had previously buoyed equity market optimism. The Dow Jones Industrial Average saw its worst session since March 2023, dropping 1.35% to close at 38,272.75. Similarly, the S&P 500 and the Nasdaq Composite fell by 1.37% and 1.8%, respectively, while the Russell 2000 index faced a near 4% decline, marking its most significant drop since June 2022. The Consumer Price Index (CPI) rose by 0.3% for the month, surpassing economists’ expectations and signaling a 3.1% increase on an annual basis.

The report also noted a higher-than-expected rise in core prices, which exclude volatile food and energy components, indicating a 0.4% month-over-month increase and a 3.9% rise from the previous year. This inflation data sent the 2-year and 10-year Treasury yields soaring, adversely impacting tech stocks such as Microsoft and Amazon, both of which led the market’s losses after having previously driven the market to record highs. Meanwhile, in corporate news, JetBlue Airways’ stock surged almost 22% following news of Carl Icahn acquiring a nearly 10% stake, contrasting with Hasbro and Avis Budget Group’s shares, which fell after disappointing fourth-quarter performances.

Data by Bloomberg

On Tuesday, the market experienced a widespread downturn across all sectors, with the overall market declining by 1.37%. The sell-off was led by the Consumer Discretionary sector, which saw the steepest decline at -1.96%, closely followed by Real Estate and Utilities, which fell by -1.83% and -1.69%, respectively. Information Technology also saw a significant drop, decreasing by -1.56%. On the less severe end, the Health Care, Consumer Staples, and industrial sectors experienced relatively smaller losses, declining by -0.87%, -0.98%, and -1.01%, respectively. This broad market pullback reflects a cautious or negative sentiment among investors across virtually all sectors of the economy.

Currency Market Updates

In the recent currency market updates, the dollar index witnessed a notable rise of 0.65%, largely influenced by the U.S. Consumer Price Index (CPI) data, which came in above forecasts. This development has adjusted market expectations regarding the Federal Reserve’s monetary policy, pushing the anticipated timing of the first rate cut from May to June and scaling back the expected total easing in 2024 to under 100 basis points, a significant reduction from the nearly 150 basis points anticipated in January. Despite the overall year-on-year inflation rate decreasing from 3.4% to 3.1% and the core rate remaining at 3.9%, the increase in the core’s 3-month annualized rate to 4.0%—its highest since June—along with a rise in the six-month annualized rate to 3.6%, signals persistent inflationary pressures. These figures have led to an uptick in both 2-year and 10-year Treasury yields, thereby widening the yield spreads over German bunds and Japanese Government Bonds (JGBs), albeit to a lesser extent over UK Gilts, which found support from unexpectedly high UK wage growth data.

The currency pair movements reflected these broader economic updates, with the EUR/USD pair declining by 0.56%, yet managing to hold above the 1.0700 mark. The market’s attention now turns to the upcoming retail sales data, which could further influence the dollar’s trajectory and potentially trigger a move toward the 1.0500 level, echoing the sentiment from the Fed’s December projections. On the other hand, the USD/JPY pair saw a significant increase of 0.94%, surpassing the 150 mark and indicating a possible retest of the 2022/23 peaks unless there’s intervention from Japan’s Ministry of Finance. The Sterling experienced a slight decline of 0.3%, even after an initial surge, influenced by bullish UK job data and upcoming economic reports that are expected to play a crucial role in Bank of England’s policy decisions and the pound’s valuation. The Australian dollar also faced a downturn, dropping by 1.2% amid a broader move away from riskier assets and declining metal prices, highlighting the interconnected nature of global financial markets and commodity prices on currency valuations.

Picks of the Day Analysis

EUR/USD (4 Hours)

EUR/USD Dips to New Yearly Low Amidst USD Surge and Rate Cut Speculations

The EUR/USD pair experienced a significant decline, reaching a new yearly low around the 1.0700 mark as the US dollar strengthened across the board, driven by heightened expectations of a Federal Reserve monetary easing cycle potentially starting in June. This outlook was reinforced by rising US yields and a decrease in the likelihood of a May rate cut, following unexpectedly low US inflation figures. Meanwhile, in Europe, despite positive economic sentiment indicators from Germany and the broader euro area, concerns over the economic situation and expectations of ECB interest rate cuts reflect growing economic uncertainty. The ECB’s cautious stance on the timing and extent of future rate cuts underscores the delicate balance central banks are navigating in their efforts to control inflation while supporting economic growth.

Chart EUR/USD by TradingView

On Tuesday, the EUR/USD moved lower and reached the lower band of the Bollinger Bands. Currently, the price is moving just above the lower, suggesting a potential slightly upward movement to reach the middle band. Notably, the Relative Strength Index (RSI) maintains its position at 32, signaling a bearish outlook for this currency pair.

Resistance: 1.0725, 1.0796

Support: 1.0662, 1.0595

XAU/USD (4 Hours)

XAU/USD Plummets to Two-Month Low Amid Surging US Inflation and Dollar Strength

Gold prices tumbled to their lowest in two months, hitting $1,989.97 per ounce, as the US revealed stronger-than-expected inflation data, prompting a sharp rally in the US Dollar. The US Consumer Price Index (CPI) for January indicated a monthly rise of 0.3% and a core inflation increase of 0.4%, both surpassing market forecasts. This inflationary pressure, evidencing a year-over-year rise to 3.1%, has bolstered the Federal Reserve’s cautious stance on monetary policy adjustments, leading to a surge in risk aversion across financial markets. Consequently, gold’s value has suffered significantly due to the strengthened US Dollar and shifting investor sentiment.

Chart XAU/USD by TradingView

On Tuesday, XAU/USD moved lower and reached the lower band of the Bollinger Bands. Currently, the price moving around the lower band, suggesting a potential downward movement to reach lower to the support level. The Relative Strength Index (RSI) stands at 27, signaling a bearish outlook for this pair.

Resistance: $2,004, $2,023

Support: $1,988, $1,973

Economic Data

CURRENCIES:

• US Dollar and CPI Data Release: The U.S. dollar’s movement shows uncertainty as the market awaits the crucial U.S. Consumer Price Index (CPI) data. This report, expected to indicate a slowdown in inflation to 2.9% from 3.4%, is seen as vital for future Federal Reserve policy adjustments.
• Focus on January Inflation: The upcoming inflation data is crucial, with analysts predicting a decrease in headline inflation. This potential decline is awaited as a positive development, suggesting progress in the Federal Reserve’s efforts to control inflation.
• Analysis of Gold, USD/JPY, and GBP/USD: The article provides insights into the expected market movements of gold prices, USD/JPY, and GBP/USD, influenced by the inflation report.
• Market Reaction to Inflation Figures: The market’s response to the CPI will depend significantly on whether the actual data aligns with or deviates from expectations. Core inflation figures will be particularly scrutinized for indications of inflation trends.

Possible Outcomes Post-CPI

• If Inflation Remains High: A higher-than-anticipated inflation rate could push yields and the U.S. dollar higher, negatively affecting gold as it delays potential Fed rate cuts.
• If Inflation Is Lower Than Expected: Conversely, CPI figures lower than expected could decrease bond yields and the U.S. dollar, potentially benefiting gold and other precious metals.

STOCK MARKET:

• Inflation Drop Expected: Inflation is anticipated to fall below 3% for the first time since March 2021, marking a significant deceleration from December’s 3.4%.
• Key CPI Data Release: Investors await the January Consumer Price Index (CPI) report, set for release, predicting a headline inflation of 2.9%.
• Core Inflation Analysis: Core CPI, excluding food and gas, is expected to show a yearly rise of 3.7%, with a monthly increase of 0.3%, indicating a slowdown from December’s figures.
• Factors Influencing Core Inflation: Bank of America notes high shelter prices and volatile categories like used cars as reasons for sticky core inflation, but expects shelter inflation to moderate through the year.
• Federal Reserve’s Interest Rate Decision: Despite inflation remaining above the Fed’s 2% target, expectations for rate cuts are being tempered by Federal Reserve Chair Jerome Powell and other Fed officials, citing the need for more evidence of sustainable inflation reduction towards the 2% goal.
• Market Expectations and Fed’s Strategy: Markets are leaning towards the Federal Reserve keeping rates unchanged in March, with potential cuts anticipated in the following meetings, as the Fed aims to build confidence in its inflation-fighting strategy while balancing risks.

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Please note that the dividends of the following products will be adjusted accordingly. Index dividends will be executed separately through a balance statement directly to your trading account, and the comment will be in the following format “Div & Product Name & Net Volume ”.

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As the markets recalibrate from the recent rate and dollar surge, all eyes this week turn to the US CPI and retail sales data for January, potentially marking a pivotal moment for future rate adjustments. With the Federal Reserve’s rate cut expectations pushed further into the year, the upcoming reports on inflation and consumer spending are keenly awaited for clues on the economic trajectory and its impact on currency markets. 

US Economic Outlook: a soft landing? 

The upcoming CPI report for Tuesday is expected to reveal a slight deceleration in inflation, with headline inflation anticipated at 2.9% year-over-year, a decline from December’s 3.4%, while core inflation, excluding volatile food and energy prices, is predicted to slow to 3.7% from 3.9%, largely influenced by decreasing used car prices, indicating a gradual path towards inflation normalization. Additionally, retail sales data set to release on Thursday may indicate a slight contraction, with forecasts suggesting a 0.2% drop, potentially due to subdued auto sales, signaling a modest beginning to the year for consumer spending. Despite this, broader economic indicators such as industrial production project an economy expanding slightly above the Federal Reserve’s long-term sustainable rate. 

Global context: inflation and growth dynamics 

Internationally, the UK’s CPI data and Q4 GDP reports from the UK and Japan will offer additional insights into global inflation trends and economic health. The expected fluctuations in inflation rates, particularly with the anticipated sharp declines in year-over-year comparisons for the UK, eurozone, and Canada, will be critical for currency traders monitoring the global economic pulse. 

Implications for currency markets 

For currency markets, particularly forex traders at VT Markets, these economic indicators are crucial. A softer-than-expected CPI and weak retail sales could cap US rates, potentially halting the dollar’s rally. Moreover, global economic data will provide further context for the forex market, influencing currency pairs and trading strategies. 

As we navigate through these economic releases, traders should remain vigilant, adapting strategies to accommodate the evolving market landscape. The anticipated data not only offers insights into the US economy’s health but also shapes expectations for central bank policies across the globe. 

Stay tuned to VT Markets for real-time analysis and insights on how these developments impact currency markets and trading opportunities. 

Conclusion: a week of economic revelations 

The week ahead promises to be a crucible of economic revelations, with US CPI and retail sales data at the forefront. As we dissect these indicators, their broader implications for interest rate policies, currency markets, and global economic health come into sharper focus. For market participants, these moments are not just about interpreting numbers but about understanding the narratives they weave and the market directions they suggest. In the ever-evolving world of forex trading, such insights are invaluable, guiding strategies in a landscape where precision and foresight are paramount. 

CURRENCIES:

• Gold Price Trends: Gold prices declined due to an increase in U.S. Treasury yields and a stronger U.S. dollar.
• Currency Market Movements: The EUR/USD and GBP/USD experienced slight drops but remained above critical technical levels.
• Anticipation of U.S. Inflation Data: The upcoming U.S. inflation report is expected to significantly influence market volatility in the following week.
• Stock Market Performance: Despite the pressure from rising bond yields, U.S. stocks, including the S&P 500 and Nasdaq 100, achieved record highs.
• U.S. Dollar Strength: The U.S. dollar has been on an upward trend for four weeks, affecting currency pairs like EUR/USD, GBP/USD, and leading to a notable rally in USD/JPY.
• Potential Market Reactions to CPI Report: The January inflation data release could lead to substantial market fluctuations, with traders advised to brace for potential sharp price movements.
• Impact of Inflation on Markets: An inflation rate exceeding expectations could boost U.S. yields and the dollar but negatively affect stocks and gold. Conversely, lower-than-expected inflation figures might decrease yields, weaken the dollar, and support equities and gold prices in the short term.

STOCK MARKET:

• Economic data: New York Fed one-year inflation expectations, January (3.01% previously)
• Earnings: Avis Budget Group (CAR), Monday.com (MNDY), Waste Management (WM), Zoominfo Technologies (ZI)
• Key Market Indicators: Inflation, retail sales, and corporate earnings are pivotal factors for the market this week.
• S&P 500 Milestone: The S&P 500 surpassed the 5,000 mark for the first time, continuing a positive trend seen in recent weeks.
• Corporate Earnings Reports: About 15% of S&P 500 companies, including John Deere, Coinbase, Airbnb, and Shopify, are scheduled to report their earnings.
• Inflation Expectations: The Consumer Price Index (CPI) for January is anticipated, with an expected annual gain of 2.9%, signaling a decrease from December’s 3.4%.
• Core Inflation Forecast: Excluding food and energy, core inflation is projected to have risen by 3.7% year-over-year, with a monthly increase of 0.3%.
• Consumer Spending Outlook: January’s retail sales report is awaited, with an expected 0.2% decline from the previous month, influenced by seasonal factors and weather disruptions.
• Automotive Industry Earnings: Stellantis is set to report its earnings, with attention on its performance and electric vehicle (EV) strategy following positive surprises from Ford and GM.
• Earnings Performance: So far, 75% of S&P 500 companies have reported earnings, showing a trend towards the second consecutive quarter of earnings growth.
• Analyst Insights: High earnings beat rates among U.S. companies suggest strong market performance, with expectations of continued earnings growth over the next two years.