The Fed and Financial Institutions Debate Interest Rates Hikes

The war of words continues between the Federal Reserve and large financial institutions. The latest to take part are Fed members Mr. Bostic and Ms. Daly, and from the market’s side, UBS and Goldman Sachs. Two potential hikes are on the table for February 1st, either 0.25% or 0.50%, according to Mr. Bostic and Ms. Daly. A 0.25% hike would be lower than what is already priced within the market and the weakest hike since the cycle started. 

Inflation and Interest Rate in Focus

The hike will depend on the next inflation figures according to Mr. Bostic and Ms. Daly. Both members also advised a pivot this year is not an option at the moment. Mr. Bostic said rates will remain above 5% for “a long time”. UBS on the other hand, fought back advising they believe the Fed will be “forced” to cut rates this summer. UBS stated that they believe the US is at a 65-70% chance of dropping into a recession this year while the Eurozone is at 80% and the UK is at 90%. According to UBS, all point to rate hikes. 

Therefore, based on the latest developments stated above, Thursday's inflation rate will be detrimental to the price of all assets. The Consumer Price Index (monthly) is expected to read 0.0 - 0.1%, most economists expected 0.0%. The yearly inflation rate will therefore decline to 6.5%. Anything lower than the predicted figure will likely push the Federal Open Market Committee towards a 0.25% hike in February 2023. Potentially this can be positive for stocks and negative for the Dollar. The Dollar may specifically come under pressure if the European Central Bank hikes 0.50% again, as previously expected last month. 

The US Dollar continued to decline yesterday and the market’s experienced the US Dollar Index decline to an 8-month low. The price movement yesterday was sparked by comments from Mr. Bostic and Mrs. Daly. In addition to this, the Dollar seems to be experiencing a drop in demand as the rate cycle’s conclusion edges nearer. The US Dollar Index currently reads 103.28 which is slightly higher than the day’s open price. However, the price will largely be influenced by Thursday's CPI announcement. 

NASDAQ - Investors Eye CPI and Earnings Report

The NASDAQ’s price action was interesting over the past 24-hours as the instrument reached a 35-day high but then followed by a sharp decline. The price this morning is also slightly lower, but the instrument is still trading within a higher impulse wave on the larger timeframes. 

The NASDAQ found resistance at the $11,302 price which also affected traders' decisions on the 19th and 20th of December. However, the price at that time was also affected by the Christmas period and traders are now considering whether the asset will be able to break through the resistance level.

NASDAQ 3-Hour Timeframe on January 10th 

Though traders should note that this will largely depend on Thursday's inflation figures and also the outcome of this month’s earnings reports. In terms of technical analysis, the price has formed a retracement which means the price may continue its bullish trend or aim for a full-price correction. Crossovers on the larger timeframes such as the 4-hour and daily are indicating a bullish trend. Whereas smaller timeframes are indicating a retracement. The Bollinger bands are also giving mixed signals depending on the timeframe. 

NASDAQ 1-Hour Timeframe on January 10th 

Therefore, technical analysis is giving an indication of an upward trend with medium-size retracements along the wave. Though this may change if the asset forms a “lower low and high” if the price forms a breakout at $11,044.

Furthermore, a strong increase in Tesla’s stock price has supported the NASDAQ. Tesla’s stocks increased by almost 6% during yesterday’s session. However, the stock is under pressure from certain fundamentals. For example, the latest reports show that the sales of Chinese-made cars amounted to 55,796 last month, which is the lowest figure in the last five months. This is 44% lower than in November and 20% lower than in 2021.

The stock market has been pressured by the FOMC advising they will not cut rates, but at the same time, a 0.25% may potentially support investor sentiment. Today the US stock market will largely be influenced by the Federal Reserve’s Chairman's speech at 16:00 GMT+2. The market is hoping for further indications on the size of February’s hike and if a cut is possible even if a recession hits.

Summary:

• FOMC members confirm a 0.25% and 0.50% rate hike is being considered. 
• The next interest rate hike will depend on inflation which is expected to read 0.0% this Thursday. 
• Stocks are supported by a possible lower rate hike but investors remain cautious as the Fed may not cut rates.