by CPI Shows Need For Further Rate Hikes
On Tuesday, financial markets started the day with optimism, but investors became more cautious as the afternoon trading session progressed. The release of the US CPI played a key role in this shift in investor sentiment.
The CPI, a measure of change in prices of goods and services purchased by consumers, showed a rise of 6.4% in the last month. While this number is better than December’s 6.5%, it still falls short of the Federal Reserve’s (FED) intended inflation target of 2%.
The FED has indicated that it may continue raising interest rates in the coming months to combat inflation. The rise in interest rates is intended to make borrowing more expensive and slow economic growth, which helps reduce inflation.
In addition, this shift towards a tighter monetary policy could impact the financial markets, as higher interest rates make it much more expensive for companies and individuals to borrow money.
Lorie Logan, the President of the Dallas Federal Reserve, added to the pressure of a potential interest rate hike when she suggested that it may be necessary to continue raising interest rates for longer than originally planned. John Williams, the New York Fed President, echoed this sentiment, who stated that we are miles from seeing the end of the rate hikes.
However, there was some positive news from Patrick Harker, the President of the Philadelphia Federal Reserve, who suggested that while the hikes are not done, they are close. This statement suggests that the end of the rate hikes may be in sight.
In the Eurozone, Gabriel Makhlouf, a member of the European Central Bank (ECB), indicated that the ECB would continue with rate hikes. He cited that the ECB would hold rates above 3.5% for the next ten months.
This statement suggests that the ECB is taking a more aggressive approach to combating inflation and may continue to raise interest rates in the future. As a result of the CPI release, the market moved away from high-yield assets, causing the US market to slow down.
Additionally, the dollar surged. This shift in the market demonstrates the CPI’s impact on investor behavior. As a result, investors use this data to gauge the economy’s health and make investment decisions accordingly.
It will be important to monitor future CPI releases to understand how the market will respond. If inflation rises, the FED may raise interest rates, which could significantly impact the financial markets. Conversely, inflation may lower interest rates to stimulate economic growth if inflation falls below the FED’s target.
Currency Watch
On Tuesday, the EUR/USD currency pair fluctuated between 1.0700 and 1.0800 before settling at 1.0730. The GBP/USD pair hit a high of 1.2268 but closed the day at 1.2160. The USD/JPY pair ended the day above 133.0, while the AUD/USD pair traded at 0.6980 throughout the day. Market participants were waiting for Philip Lowe, the Governor of Australia’s Reserve Bank, to testify at the Senate about the direction of rate hikes.
The USD/CAD currency pair ended the day at 1.3340, showing little change from the previous day. In the commodity markets, gold dipped to $1850, while crude oil traded at $79 per barrel. Various factors impacted these commodities’ movement, including global economic conditions, supply and demand dynamics, and geopolitical events.
