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Strong macroeconomic data and persistent inflation in the U.S. has pushed the Dollar up above its established trading range. Stock indices have been reluctant to this move so far.

Blistering consumer prices are a real headache for the Federal Reserve (Fed) as they are deliberately slowing down. The Consumer Price Index was recorded at 6.4% year-on-year in January compared to 6.5% in the previous month. The Producer Price Index rose by 0.7% month-on month, well above the previous level of -0.2% and the forecasted 0.4%. Such a situation is likely to be translated into a new wave of rises in consumer prices in a couple of months.

Inflation could also rise due to increasing retail sales which will likely push demand inflation up. Retail sales in the U.S. added 3% in January compared to December levels when retail sales were down by 1.1%. Initial Jobless Claims were down to 194,000 from 195,000 a month before, well below the forecasted 200,000. Overall data is clearly indicating to a strong labour market in America.

This may point to several observations. Inflationary pressure may increasingly prompt the Fed to act broadly with additional monetary tightening. Strong economic performance in the U.S. could make such actions less damaging. These incentives may lead to further monetary tightening, including both interest rate hikes and the clearing up of the Fed’s balance sheet. Fed officials have given out a clear message about such perspectives, and the market has been seen to be receiving this message now. The U.S. Dollar index rose from 102.4 to 104.6 points last week. The next target is at 104.8-105.0 points.

Investors’ expectations of changes in interest rates have been amplified. According to FedWatch Tool last week the Fed was expected to raise interest rates to 5.25% with a probability of 9% and to 5.0% with a chance of 91%. The balance has drastically changed as on February 21 18% of investors bet the Fed will raise interest rates to 5.25% in March, while 82% believe the rates will be raised only to 5.0%. The peak of the interest rate hike cycle is expected to be reached in June at 5.5% by 53% of investors instead of 5.25% that was expected by 38% of investors a week before.

U.S. Treasuries yields are notably rising with the 10-year T-Note yield up from 3.67% to 3.82%, and for 2-year Notes the yield rose from 4.51% to 4.62%. The spread between those two T-note yields contracted from 0.84 to 0.80 percentage points, a down fall which points to lower recession fears.

These considerations may be translated into the following targets of major currencies: for the EURUSD – at 1.0520, for the GBPUSD – at 1.1890, for the USDCHF – at 0.9390, and for the USDJPY – at 136.8. Nonetheless, the Japanese Yen may not lose ground as rapidly as expected by the market crowd after the appointment of the new governor, Kazuo Ueda, who is known for his tighter attitude to monetary policy compared to his predecessor, Haruhiko Kuroda.

Stockw are less affected by the recent macroeconomic developments and a possible additional monetary tightening by the Fed. It could be supported by higher-than-expected inflation and a lower inversion of the debt yield curve, which is considered to be an indication of an upcoming recession. The S&P 500 broad market index is holding above the support at 4060 points, and NASDAQ – above 11625 points. Nevertheless, stock indexes are looking down. Further movements of the S&P 500 index below 4000 and towards 3900 points may be expected over the coming weeks. NASDAQ may dive below 11625 points towards the 10820 support level.

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