All eyes on the Federal Reserve – Daily Market Brief, December 14, 2022

The mood is cautious, with the USD hovering around a 6-month low ahead of today’s Federal Reserve interest rate decision.

·         A 50-basis point hike is expected after inflation cooled further in November.

·         Will the Fed terminal rate be above 5%, indicating more rate hikes for longer?

·         GBP/USD falls after UK inflation cools to 10.7%YoY in November, from 11.1%

Signs that US inflation has passed its peak fueled a rally in the US stock market yesterday and pulled the US dollar to a six-month low. US CPI rose to 7% YoY in November, its lowest annual rate this year, and core inflation cooled by more than expected to 6%, raising hopes of a less hawkish Federal Reserve.

The data sent bond yields sharply lower, and stocks on Wall Street surged to a 3-month high before giving back some of those gains. The Nasdaq closed 1% higher, and the S&P 500 closed up 0.7%, above the key 4000 psychological level.

U.S. stocks closed well off the daily high, which is setting Europe up for a modestly weaker start on the open. The DAX points to a -0.1% fall on the open, the CAC is set to dip 0.05%, and the FTSE is pointing to a flat start amid a cautious market mood.

Fed rate decision

The mood is cautious, and trading is subdued ahead of the Federal Reserve interest rate decision later today, where the US central bank is expected to raise interest rates by 50 basis points, after four consecutive meetings of 75 basis point hikes. Federal Reserve Chairman Jerome Powell guided for a downshift in the pace of rate hikes in his speech on the 30th of November.

Yesterday’s inflation data is not likely to impact today’s rate decision, but it could support the Federal Reserve slowing the pace of hikes further in 2023. That said, it is important to remember that while inflation is slowing, it is still 3.5 times the Feds’ 2% target, something the Fed could draw the market’s attention to.

Whether the Fed slows the pace of rate hikes further to 25 basis points in 2023 depends largely on the data between now and then. Another US non-farm payroll report is due in early January, followed by another inflation report ahead of the first FOMC meeting next year.

In addition to the rate decision, updated quarterly growth and inflation projections and a revised dot plot will be in focus. Any downward revision of inflation expectations could be considered dovish and drag the USD lower. Meanwhile, should the Fed’s terminal rate forecast rise much above 5%, this could indicate more rate hikes for longer, a hawkish outcome, boosting the USD and dragging on stocks.

UK inflation

Turning attention back towards the UK, inflation rose by less than expected at 10.7% YoY in November, down from 11.1% in October, a 40-year high and below the 10.9% forecast. Core inflation, which was expected to hold steady at 6.5%, fell to 6.3%. 

The data could be a tentative sign that inflation is starting to cool. But one data point does constitute a new trend, so more data is needed here before any firm conclusions can be drawn, especially given that wage growth is still accelerating.

The BoE is expected to raise interest rates by 50 basis points in tomorrow’s meeting and this data is likely to change that.

GBP/USD trades -0.1% at 1.2350 following the data, after reaching a 6-month high of 1.2440 yesterday.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

 Sources: Bloomberg, CNBC, Reuters 

Original article provided by Trading Writers

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