Markets Cheer As Inflation Beast Retreats

The bad news…is the fact that it’s still running dangerously hot for the Federal Reserve.

Inflation Was Cooler Than Expected

In a welcome development for financial markets, the annual inflation rate in the United States slowed to 7.7% in October, the lowest level since January. This figure was below the 7.9% market forecast and much lower than the 8.2% witnessed in September. Core inflation which strips out food and energy prices rose 6.3% year-on-year last month, after rising to a 40-year high of 6.6% in September.

Market Reaction

After being blasted by monetary policy bazookas in the form of 75bp rate hikes, the US inflation beast seems to be retreating. This has boosted market sentiment, sending the S&P500 and Nasdaq futures surging over 3%. In the currency markets, the dollar has collapsed like a house of cards while gold prices are up over 1.5% with bulls breaking through the $1725 level!

In a nutshell, US inflation is cooling faster than expected and this is reducing the pressure on the Fed to keep raising interest rates aggressively. According to Bloomberg, traders are now only pricing in a 50bps point rate hike in December. With the Fed adopting a less aggressive approach towards rates as inflation cools, this continues to ease fears over a rate hike-induced recession. As growth concerns ease, the market mood is set to improve – supporting equity markets but pressuring the dollar which remains a safe-haven destination.

Technical Charts

Looking at some quick technical setups, the dollar index may test 108.00 in the near term.

Earlier in the week, we identified how 1.2400 was an important level on the equally-weighed USD index. Prices have cut through this level like a hot knife through butter and even the 1.2340 target. The downside momentum could drag prices towards 1.2200.

The EURUSD has punched above 1.0100 and could venture higher thanks to dollar weakness.

Little needs to be said about the S&P500…

Gold has experienced a strong breakout which could signal the start of a bullish trend on the daily charts.

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