US Inflation Drops Ahead of the Fed Rate Decision

The US Bureau of Labor Statistics has confirmed that inflation has declined to 7.1% which is the lowest in 2022. This feeds into the bias that the Federal Reserve will take a less restrictive stance during tonight’s rate decision and forward guidance. Currently, experts have advised that the Federal Reserve will hike a further 50 basis points during tonight’s meeting and then possibly take a wait-and-see stance.  This is especially likely if December’s inflation rate is also similar.

The US inflation rate has now declined for 5 consecutive months from 9.1% to 7.1%. The decline still falls short of the Fed’s target of bringing inflation down to 6.5% by the end of 2022. However, the Consumer Price Index still read 0.2% lower than expected by the market. The Core Consumer Price Index read 0.2% instead of the predicted 0.3%, which is the lowest since October 2021.

It should be noted that inflation is still not low enough for the Fed. Nonetheless, the regulator is likely to allow the lagging effect a chance to continue pressuring inflation. Some economists, such as Scott Thiel from Blackrock, have advised the Fed may see their terminal rate at 5%. This means another 50 basis point hike in the first quarter of 2023.

Market’s Reaction to Latest Inflation Figures

So how have global assets reacted to the latest inflation data? The US Dollar index was originally 103.85 but has increased this morning back up to 104.10. As a result, this has caused a retracement in favor of the Dollar against most competitors. The price of Oil and Gold have been the real winners from the latest inflation reading. Traders can also watch today’s technical analysis video for more information on Gold.

Both Gold and Crude Oil have taken advantage of the weaker US Dollar as have other currencies such as the Euro. The price of Crude Oil has also been supported by supply concerns from Russia and also news from China. According to experts, Russia is expected to lower production and supply in response to the price cap. The lower supply can support prices as can reports that Chinese authorities will continue to relax quarantine measures. Supply continues to remain under pressure as the US’s Keystone Oil Pipeline remains closed for repairs.

The stock market was the category that saw the weakest price movement. The price of the stock market saw a strong spike in price after the announcement increasing by 2.25% within one hour after the announcement. However, the higher price prompted a lot of traders to sell their stocks, potentially to cash in profits. For example, buyers from Monday would have had almost a 5% return within only 2 trading sessions. Many chose to lock in profits and were not comfortable trading above previous resistance levels. This triggered a surge in sellers in response to the higher price.

Dow Jones 1-Hour on a December 14th

The price of most global stocks, including both US and European Stocks have declined during this morning’s futures market. The European Central Bank is expected to increase the rate by 0.50% at tomorrow’s rate decision.

GBP/USD

The GBP/USD rate increased again over the past 4 hours after forming a retracement after yesterday's price spike. The price of the Pound has been supported across the market as inflation has slightly declined to fuel hopes that the cost of living crisis may have peaked.

In terms of technical and price analysis, the instrument continues to receive indications of a further increase in value. The price is still hovering above most moving averages and above 50.0 on most oscillators. However, traders looking to further speculate the decline will mainly be looking for a bullish breakout at 1.23810. Traders looking to trade in favor of the Dollar will be focusing on a breakout of 1.2340.

GBP/USD 1-Hour on December 14th

The UK CPI figures also read lower than predicted by most analysts. The Yearly CPI declined to 10.7%, down from 11.1% and lower than the expected 10.9%. The Core CPI also declined to 6.3% which is the lowest in 3-months. However, UK investors will mainly be focusing on tomorrow's Bank of England Rate decision and speech.

Throughout the day investors across the globe will be fixed on tonight’s Federal Reserve rate decision, economic projections and press conference. Investors will specifically be eager to obtain indications on the terminal rate and how the Fed believes the economy will perform over the next 6 months. Traders should expect volatility from the events.

Summary:

• The US Bureau of Labor Statistics has confirmed that inflation has declined to 7.1%.
• US Inflation read lower than expected by market participants and inflation declined to the lowest level in 12 months.
• UK Inflation also declines more than expected but remains significantly higher than US inflation figures.
• Gold and Oil are supported by a weaker US Dollar while Stocks come under pressure from sellers.