Inflation Data Fuels Market Speculation, Fed Pivot Expected

The UK monthly Gross Domestic Product declined by 0.3%, the sharpest decline since February 2023. However, economists believe the quarterly figures will read 0.1%, keeping the UK from a recession. Many analysts are advising the Prelim GDP figure showing 0.1% is positive as it shows the UK economy may be able to avoid a recession despite double-digit inflation, nationwide strikes and interest rates above 4%.

Within the currency market, the US Dollar saw the strongest bullish price movement, increasing in value against all major currencies. The US Dollar Index rose from 101.50 to more than 102.00. This is the highest price the index has experienced this week, but it is also a psychological level for traders. Over the past month, the price has collapsed at the 102.00 level on four occasions. This morning, the US Dollar index is slightly declining, but the price action after mid-day will bear more importance. This is because, after mid-day, investors prepare for the opening of the US Trading Session. 

The US Stock market witnessed mixed price movement, with the S&P 500 and the Dow Jones declining due to a sharp selloff. The Dow Jones original decline measured almost 1.20% before correcting upwards and ending the day 0.70% lower. The fall was largely a result of Disney’s poor earnings report and forward guidance for the next quarter. Disney stocks dropped almost 9%. However, the stock market may still be positively influenced by weakening inflation and negotiations to raise the US debt ceiling. 

GBP/USD - UK Avoids Recession 

Yesterday, the GBP/USD saw its largest decline since March as the US Dollar appreciated across the whole market while the Pound declined. However, this morning's Pound is increasing in value as the Dollar declines against most currencies, except the Japanese Yen. Yesterday’s Bank of England rate decision and this morning’s UK economic data primarily influenced the exchange rate. 

The Bank of England is increasing the base rate from 4.25% to 4.50%, but the monetary policy committee did not see any members vote for a more aggressive hike. The positive news for the Pound is the governor does not expect the UK economy to decline into a recession. This morning’s Prelim Gross Domestic Product also indicates a 0.1% growth, which would keep the UK economy out of a recession. As a result, the FTSE100 is also experiencing strong price increases. 

Even though the exchange rate is increasing this morning, the upward price movement is only forming a retracement so far. Again, looking at the regression channel and breakout theories, the indication so far only indicates a retracement and that sellers will maintain control. However, if the price does continue to rise above 1.2585, indications may change in favour of the Pound. 

GBP/USD 1-Hour Chart on May 12th 

Yesterday’s Producer Price Index did not significantly affect the US Dollar, which came in lower than expected. In addition, the Unemployment Claims for the week also increased to a high new for 2023. The data continues to point towards the Federal Reserve taking a softer tone and possibly pivoting later in the year. The price increase can be influenced by the debt ceiling negotiations proceeding positively. 

NASDAQ - Investors Contemplate Fed Pivot after Inflation Data

The NASDAQ did experience declines at mid-day, as did other indices, though the declines were significantly weaker, and the instrument increased to a new high. The index has increased in value for three consecutive days and is forming its third week of climbs.  This morning, the NASDAQ has slightly risen, but investors will monitor the price action closer to the open trading session. 

The main driver of the stock market is the inflation data released over the past week. Inflation data, including the Consumer Price Index and the Producer Price Index, have read lower than economists expected. As a result, traders continue to predict a weakening inflation rate and a lesser need for the Federal Reserve to Hike or avoid a decline. The Producer Price Index from yesterday read 0.2% vs. the 0.3% expected by investors. However, traders should note that most economists believe that inflation will be harder to bring down at the same pace over the next few months. 

NASDAQ 30-Minute Chart on May 12th 

The NASDAQ has formed its third impulse wave and has climbed to a higher high on three occasions this week. For this reason, investors are cautious that the asset may be overbought, especially as investors may also look to avoid “weekend risk”. Trend-based indicators such as Moving Averages and Stochastic Oscillator continue to point towards an upward price movement. The only concern for investors is that the asset is forming a divergence pattern when monitoring the RSI, which could indicate that momentum will be lost.

Summary:

• The NASDAQ has increased in value for three consecutive days and is forming its third week of climbs.
• The Bank of England is increasing the base rate from 4.25% to 4.50%, but the monetary policy committee did not see any members vote for a more aggressive hike.
• The positive news for the Pound is the governor does not expect the UK economy to decline into a recession. 
• Inflation data, including the Consumer Price Index and the Producer Price Index, have read lower than economists expected. Investors contemplate whether the Fed may consider pivoting later in the year.