Market Overview

Markets have been moving in a paradoxical manner over the last couple of days despite the slowing down of inflation. The Consumer Price Index (CPI) was down to 7.1% in November after 7.7% in October. But any expectations that the Federal Reserve (Fed) would ease its hawkish monetary policy remain wishful thinking. Further tightening may seem excessive as inflation is going down on its own, while the economy is further discouraged by rising borrowing costs along with the recession risks that make such a mood inevitable.

The Fed has not only raised its interest rates from 4% to 4.5% but also made a hawkish forecast about further rate hikes. Interest rates are expected to be raised to 5.1% in average by the end of 2023 compared to the previous forecast of 4.6%. That would mean that the Fed is not going to lower its interest rates in 2023 as previously thought. So, risky assets have come under crossfire as inflation is still high and a recession is expected to settle into the economy. Meanwhile, the Fed made it clear that it will bring inflation under control no matter the cost.

Other central banks are following this example. The Bank of England, European Central Bank, and Swiss National Bank also raised their interest rates by the amount of 50 basis points. Even the dovish Bank of Japan surprised markets on December 20 by adjusting its yield curve to 0.5% from the previous 0.25%. This means more expensive borrowing, which is negative for the stock market and the economy.

Retail sales in the United States dropped into negative territory to -0.6% in November from 1.3% in October and in the United Kingdom it dropped to -0.4% from 0.9% for the same period. So, corporations are meeting lower demands amid high inflation costs. Lower demands and rising costs are expected to increase as borrowings and investments become more expensive, curbing margins and profits.

So, the stock market got a one-two punch. The S&P 500 broad market index fell from 4100 points on December 13 to 3800 points on December 20, or by 7.3%. The 4100 points threshold is seen as an insuperable resistance level. The most likely downside target may be located at 3700 points. However, what is considered to be a tradition of Santa rally may bring the index up to 3950-4000 points shortly.

So, where is the Dollar? The reaction of the Greenback is one of less aggravation comparted to reactions of the other major currencies. Most central banks also raised their interest rates, cushioning a possible Dollar rally. So, the Dollar index (DXY) has distanced itself from its December lows at 103.1 points and is moving towards the 104 mark. However, this may only be the beginning as the U.S. economy is seen to be stronger than others, including stronger GDP growth, employment, and inflation. So, it may be sustainable even at higher interest rates. Its nominal value is higher than in the United Kingdom, the Eurozone, Japan, Canada, Switzerland, and Sweden, whose currencies are included in the U.S. Dollar index calculation. This difference allows U.S. Treasuries yields to rise further up.

Geopolitical and recession risks are pushing capital towards safe haven assets, which are Dollar-denominated assets. These risks are higher in Europe. As a result, technical targets for major assets may look like the following: DXY – 108 points, EUR/USD – 1.0210; GBP/USD – 1.1620; USD/JPY – 138.2.

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.