Dollar Index Has Hit A Three-Month High. Fed May Tighten The Monetary Policy

Fundamental analysis of Forex market

The consumer price index data slightly shocked financial markets. Annual consumer inflation accelerated to 5.4% from 5% (the forecast was 4.9%), and the core CPI increased to 4.5% from 3.8% (with the forecast of 4.0%), it’s a record for the last 30 years. This data shows that inflation is out of control and revives investor fears that the Fed will tighten monetary policy in the near term. Today, traders should be watching closely what Jerome Powell will say during his speech to Congress. However, the Chairman of the Federal Reserve Bank (FRB) of San Francisco, Mary Daley, still believes that the acceleration of inflation in the USA is temporary.

On the other hand, the dollar index, which has an inverse correlation to the euro, has increased, as investors expect that the Fed will start tightening policy very soon (buy the rumor, sell the fact).

Despite the rising quarterly results, the banking sector closed in the red zone yesterday. And this is the first sign that investors may use the current earnings season to close their positions, which will surely lead to the beginning of a corrective movement in the major indices.

European stock indices finished trading with a slight decline. Investors are waiting for the consumer price index data release in Europe, which will be published later this week.

The situation in the oil market remains unchanged. While the OPEC+ countries have not yet reached a consensus on boosting oil production, amid an expected further reduction of oil reserves in the USA, the fundamental picture is in favor of rising prices.

The situation with gold was unpredictable yesterday. Before the CPI data was released, gold and silver prices had increased. The price fell sharply on the news, but it rose again a few hours later. A lot will depend on the plans of the Fed regarding the further monetary policy now. If there are hints from the Fed’s officials about tightening monetary policy, gold and silver prices could fall substantially.

The Asian stock market also declined amid misgivings about the US inflation. Despite the fact that the interest rate in New Zealand remained unchanged, the New Zealand dollar increased by 0.8% as, on Wednesday, the Reserve Bank of New Zealand (RBNZ) announced that it would halt its large-scale asset-buying program. Australia extends quarantine restrictions in Sydney as the COVID-19 outbreak approaches new daily records.

Main market quotes:

  • S&P 500 (F) 4,369.21 -15.42 (-0.35%)
  • Dow Jones 34,888.79 -107.39 (-0.31%)
  • DAX 15,789.64 -0.87 (-0.01%)
  • FTSE 100 7,124.72 -0.70 (-0.01%)
  • USD Index 92.77 +0.51 (+0.55%)

Important events:

  • RBNZ Interest Rate Decision at 05:00 (GMT+3);
  • RBNZ Rate Statement at 05:00 (GMT+3);
  • UK Consumer Price Index (m/m) at 09:00 (GMT+3);
  • UK Core Consumer Price Index (m/m) at 09:00 (GMT+3);
  • Europe Industrial Production (m/m) at 12:00 (GMT+3);
  • US Producer Price Index (m/m) at 15:30 (GMT+3);
  • Canada BOC Interest Rate Decision at 17:00 (GMT+3);
  • Canada BOC Rate Statement at 17:00 (GMT+3);
  • US Crude Oil Reserves (w/w) at 17:30 (GMT+3);
  • BOC Press Conference at 18:00 (GMT+3);
  • US Fed Chair Jerome Powell’s Testimony at 19:00 (GMT+3).