Sudden lower inflation in the United States in October continues to make markets anxious as there seems to be very little room for false hopes on the heels of the Federal Reserve’s (Fed) promise to continue to raise interest rates despite lower inflation figures. The Consumer Price Index (CPI) dropped to 7.7% beating the forecast of 8% and 8.2% for the previous month.
The S&P 500 broad market index soared by 7% to 4000 points by the middle of November. The U.S. Dollar index (DXY) crashed by 4% to 106 points from the 110.2 points position where it sat before the publication. U.S. 10-year Treasuries yields dropped from 4.1% to 3.8%. Such a strong and powerful market reaction could be due to markets hoping for interest rate cuts instead of keeping in mind the expected hikes. At least, stock indexes and the DXY index recorded these levels when the Fed’s rates were at 2.5%.
But the interest rate is currently at 4%, which is above the yield of 10-year Treasuries and the rate is supposed to be raised by the Fed to 5.0-5.25% in 2023. So, investors may hope the Fed may slow down the pace of interest rate hikes. With this said, the current market reaction is seen to be largely overdriven. Perhaps, investors have gotten tired of the bottomless negative mood, rising risks, tensions, and losses. Investors have been looking for any signs of tension easing so they could let off some steam, restore a sober outlook, and normalise market dynamics. An inadequate steep drop was a response to an inadequate previous rally.
So, some observations from the current market landscape could be made. Firstly, objective data, high recession risks, and geopolitical tensions continue to deliver the same downside trends. Some lower interest rate hike trajectories do not mean that the Fed could reverse the hiking cycle. Secondly, the strengthening of the Greenback and the decline of stock indexes could continue on a smoother path. Thirdly, after such a steep upside has been aligned with the trend, it may be wise to look into opening long positions for the U.S. Dollar and short positions for risky assets.
In other words, a correction to the previous correction may be expected. The nearest technical targets may be depicted at 3910 points for S&P 500 index, 108 points – for DXY, 1.0210 – for EUR/USD, 1.1620 – for GBP/USD and 141.70 for USD/JPY.
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