Last week was filled with various events and publications of important economic data, which had a significant impact on the mood of investors.
Let's start with the fact that new and mixed data on US consumer inflation was published on Wednesday, which showed a sharp increase in both the overall inflation to 7.0% and core inflation to 5.5%. But the December monthly figures, which financial markets actually expected, turned out to be controversial. Core inflation increased by 0.6% last month, which was above expectations of 0.5%, but the growth rate of its overall value sharply decreased, adding only 0.5% against November's growth by 0.8%.
This news caused a mixed reaction in the market at first, but was generally regarded by investors as positive, as it gave hope that the inflation rate might first slow down, then probably correct amid the recovery of supply chains of goods, which led to an increase in demand and inflation to the highest levels in the last 40 years during the previous acute phase of COVID-19 and stimulation of financial support measures or benefits to the population.
The published data stimulated an increase in demand for risky assets, but the US dollar began to sharply drop to a basket of major currencies. Here, the ICE dollar index has fallen below the mark of 95.00, which has been consolidating near the level of 96.00 points since the end of November. Earlier, it was declining by 0.02%, reporting to 95.13 points.
Why did the markets react so strongly to the controversial inflation data?
This can be explained by the fact that signals of slowing inflation provoked hopes that the Fed as a whole, not seeking to tighten monetary policy and wanting to somehow stimulate the economy in a pandemic, may decide not to raise rates yet and continue to observe the current situation. In this case, investors get time when they can buy shares of companies and commodity assets, taking advantage of low interest rates and hopes for the active recovery of the global economy.
So, what can these views lead to?
We believe that such sentiments may lead to the US dollar's further local weakening, as the expectation of a later start of interest rate hikes will lead to an increase in demand for shares and commodity assets. The market will continue to monitor the published inflation data and the Fed's rhetoric led by J. Powell.
Forecast for the day:
The EUR/USD pair found support after a correction at the level of 1.1400, which may lead to a recovery of its growth towards the target of 1.1540 if the positive mood continues in the market.
The USD/CAD pair is tending to fall again amid the continuing growth in crude oil prices, expectations of a later start of rate hikes in the US, and the weakness of the US dollar. This may lead to the pair's decline to the level of 1.2300.