It was reassuring to see that US inflation did not exceed expectations once! The U.S. consumer price index rose 7% in December, the highest rate in four decades, BUT the figure matched analyst expectations, and presented the idea that this could be the point we see peaking in inflation. levels and light at the end of the long and dark inflation tunnel.
But this is only a bet at the moment, as we have not yet seen the data print a number lower than the previous one. Yesterday’s data was still stronger than the previous month’s reading of 6.8%. And today’s reading of PPI should confirm that the prices of the factory gate may have risen to 9.8% in December in the United States. A figure above the 10% mark could weaken yesterday’s optimism that we are out of the woods in the inflation battle.
A cautiously positive market reaction
U.S. stock indexes reacted positively to the four-decade high inflation reading yesterday. The S & P500 gained the most among the top three U.S. indices thanks to a strong energy sector and closed the session just 0.28% higher. And Nasdaq is heading for its own 50-DMA, which stands near 16150.
There is potential for further recovery in U.S. equities as Federal Reserve (Fed) hawks went ahead of them earlier this year. The latter would slow down, but not reverse the positive pressure on U.S. yields, as the Fed has to deal with high inflation, and it has to deal quickly. In addition, according to a survey released by S&P Global Market Intelligence on Tuesday, 52% of U.S. businesses expect their product prices to continue to rise in 2022, and only 3% expect them to decline. So, it’s just the beginning of the battle, not the end.
The dollar is falling
With the Fed hawks losing ground, the dollar index has tanked below the 95 mark and even slipped below its past six-month up-trend channel base. The EURUSD finally broke above its December horizontal channel top, and above its 6-month down-trend channel top. The next natural target for the EURUSD bulls is the 1.15 / 1.1510 area, which includes a major psychological level and the 100-DMA- However, those looking for a stronger technical suggestion on a medium-term bullish investment should expect the 1.16. level fall. This is the most important 38.2% Fibonacci retracement during the May-November decline and should signal the end of the broader negative trend.
The GBPUSD also stepped above its medium-term downtrend channel and the 50% Fibonacci retracement in June-December decline. The pair was the best performer among the G10 currencies in the first week of 2022 thanks to a position failure and expectations that the Band of England (BoE) could pick a second rate at its February meeting. The BoE hawks should help the pound gain more ground against the green back in the next two weeks. Currently, Cable is preparing to test the 200-DMA, which stands just a few pipes higher at 1.3740 and advancing to 1.40 is no longer a distant dream.