Wall Street analysts were expecting inflation to decline, but the drop came in slightly stronger than previous expectations. The US inflation rate declined to 4.0% after the monthly Consumer Price Index read 0.1%. The inflation rate is now at its lowest since March 2021, which may persuade the Federal Reserve to cease its hiking cycle. However, a pause should not be seen as an indication of a potential pivot. A pause was already priced into the market, but investors will focus mainly on the forward guidance given tonight at the Federal Reserve’s press conference.
Economists are still advising the Federal Reverse is not likely to decrease the Federal Fund Rate this year. In addition to this, economists have also stated the Fed will only reduce rates when inflation hits its target if the economy requires further stimulation. The only concern for the regulators is that the core inflation rate, which excludes more volatile goods, remains high. The core inflation rate declined from 5.5% to 5.2%, slightly higher than the expected 5.2%.
As previously mentioned throughout NAGA’s daily market analysis and yesterday’s CPI webinar. A lower level of inflation is known to support the stock market and pressure the US Dollar. The US Dollar did decline to a new low, dropping to 103.13, and is now trading at 103.30, which is lower than yesterday’s open price. Additionally, all US equities rose after the inflation data, as did European indices. The NASDAQ ended the day 0.79% higher, while the German DAX rose by 0.83%.
EUR/USD - Dollar Declines as Inflation Hits a 2-Year Low
The price of the EUR/USD this morning is trading with neither gains nor losses so far but is trading 0.25% higher than yesterday’s open price. After the inflation data release, the exchange rate price rose to a 3-week high (1.08225), before forming a retracement. The current price forms an upward trend pattern when monitoring price action and wave analysis.
When monitoring the Fibonacci Retracement levels, the price attempts to break above the 38.2 level at 1.08096. If the price breaks above the 1.08096 level, investors will contemplate if the price will continue to rise to the next level at 1.08630. However, even though the fundamental news and longer-term signals point toward an upward trend, traders should be cautious of retracements. A retracement is being signaled on smaller timeframes through the Parabolic SAR and bearish crossovers. If the price breaks above 1.07955, price action may indicate the retracement has lost momentum, and bulls will regain control again.
As mentioned above, the US Dollar is under pressure from the lower inflation rate. The lower inflation indicates the Federal Reserve will not continue to hike interest rates this month. Additionally, investors fear that if inflation declines next month, the central bank may continue to hold interest rates unchanged. Whereas previously, economists were contemplating a temporary pause, with another 1–2 hikes to follow. According to the latest reports, only 7% of analysts believe the Federal Open Market Committee will hike tonight.
If the Fed holds interest rates unchanged, the price of the Dollar may remain under pressure. If the committee unexpectedly hikes 0.25%, the Dollar may attempt a full correction towards 1.0732 and 1.0666. Investors will also anticipate May’s Producer Price Index throughout the day. Markets expect the index to read -0.1%, which is relatively low. A lower-than-expected figure can again pressure the Dollar further ahead of the rate decision.
After tonight’s rate decision and the chairmen’s press conference, the market will focus on the ECB’s rate decision. The ECB will confirm their rate decision tomorrow afternoon and give a press conference again. Analysts expect the central bank to raise the Main Refinancing Rate by 0.25%.
NASDAQ - Monetary Policy Support and Revised Target Price
The NASDAQ has renewed its 2023 highs for three consecutive days and is trading more than 37% higher this year. The cheaper Dollar, weaker monetary policy outlook, and higher risk appetite influence the bullish price movement. In addition, the instrument continues to be positively influenced by upbeat earnings from most of the NASDAQ’s components. However, this will partially lose influence as time progresses.
One of the best-performing components within the NASDAQ is Meta. Meta's earnings read 13% higher than expected. The stock price has risen 117.50% this year and is outperforming most stocks within the NASDAQ. Another positive factor is that the cost of advertising and content on Instagram has grown and was 19% higher compared to the same month the year before. Nonetheless, the level of demand remains high, but will only continue if the risks of a recession continue to disperse.
Some analysts, such as Oppenheimer Funds, raised the target price to $350 from $285. Other, more cautious analysts, such as the JMP Group, raised their target to $300. This would result in a further price increase measuring 10%. Meta is the 6th most influential component within the NASDAQ. However, investors should note that the inflation data and monetary policy remain among the leading price drivers, as mentioned above.
Summary:
- The US inflation rate has dropped from 4.9% to 4.0%, the lowest since March 2021. Analysts believe this may persuade the Fed to lean towards a "pause".
- The price of equities increases while the Dollar declines due to the latest inflation data.
- The NASDAQ has renewed its 2023 highs for three consecutive days and is trading more than 37% higher this year.
- Oppenheimer Funds raise Meta's target price to $350 from $285. Whereas other more cautious analysts, such as the JMP Group, raised their target to $300
