Market Overview

November inflation data to be released on Tuesday and the Federal Reserve’s (Fed) decision on interest rates to be announced on Wednesday are unlikely to change the global upside trend for the U.S. Dollar and a downside perspective for stocks.

The Consumer Price Index (CPI) is expected to decline further to 7.3% year-on-year in November against 7.7% a month before. From its side the Fed is expected to raise its interest rate only by 50 basis points to 4.5% instead of the 75 basis points hikes performed the last four previous times. These assumptions led to rising risks on sentiment over recent weeks.

The S&P 500 broad market index has risen from 3500 points to 4000 points on a generally downward trend this year. In contrary, the U.S. Dollar index (DXY) declined to 104 points from two-decade highs around 115 points on a generally upward trend. So, many market players started debating about the sunset of the Dollar rally amid slowing down inflation and further interest rate hikes in the U.S.

The intriguing part is that the Producer Price Index (PPI) for November rose 0.3% month-on-month, beating the forecast of 0.2%, and  that the Core PPI rose by 0.4% against 0.1% in October. Core PPU does not include food and energy prices, demonstrating that prices are being pushed up by internal factors in the U.S. without the influence of the highly volatile energy or food. These producer prices will eventually be translated to consumer prices.

Michigan consumer expectations and sentiment indexes are important in this regard as leading indicators. Their recent readings went up to 58.4 from 55.6 and to 59.1 from 56.8 respectively. This data indicates rising household spending. This rise will be translated into buying activity, which again could boost prices from the demand side.

All this incoming data may be flagging the Fed to continue with its solid tightening policy. But even a slowdown of interest rate hikes would not necessarily mean a U-turn for the Fed’s monetary policy. Thus, the upside scenario for the Dollar and a downside track for stocks are intact. Interest rates could continue to rise from the current 4% to 5.00-5.25% in the first half of 2023, while 10-year Treasuries yield could be pushed up with this monetary tightening at some point from the current 3.6% to above 4.0-4.2%, attracting new money into U.S. debt market.

Recession in the Old World and geopolitical risks in 2023 could also contribute to a rising demand for the Dollar and Treasuries as safe haven assets. Stagflation could pressure other currencies, stock indexes and commodities. So, a midterm upside movement for the Greenback may be expected over the coming months, while stock indexes and other currencies may go down. Technical targets in this regard may be set on the following levels: S&P 500 – at 3900 points, DXY – at 108 points, EUR/USD – at 1.0210, GBP/USD – at 1.1620 and USD/JPY – at 141.70.

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.