Most Asian stocks ventured into negative territory this morning, while European stock markets opened slightly lower after the December US inflation report bolstered expectations of Fed rate hikes.
The U.S. Consumer Price Index (CPI) jumped 7% year-on-year, matching the median forecast of economists polled by Bloomberg and up from 6.8% in November. Core inflation, which excludes volatile items like food and energy, rose 5.5%, well above the 4.9% recorded the month before.
Markets initially offered a calm reaction to the warm report with Wall Street closing slightly higher on Wednesday. The most notable price action was seen in forex markets, with the dollar king collapsing as Treasury yields retreated, while gold bugs were injected with renewed confidence. The December CPI report presented new evidence of persistent price pressures, especially with inflation recording its biggest annual gain since 1982.
As expectations mount for the Fed’s interest rate hike as early as March, it could weigh more heavily on global equities. while supporting the dollar and medium-term Treasury yields. As markets remain sensitive to comments from Fed officials, today could see more volatility with many Fed speakers on the list.
Dollar Index (DXY) slams into 95.00
The dollar fell to a two-month low against a basket of currencies yesterday after inflation figures for December matched expectations. Investors may have viewed this data as bearish for the global reserve currency as they may have expected the numbers to be even hotter. Still, the headline jumped 7% last month, its biggest year-over-year increase since June 1982, and seven of the last nine posts are now above consensus. Traders are currently banking on an 84% chance of at least one rate hike by mid-March 2022.
Technically, the Dollar Index remains under pressure on daily charts. A breakdown below 95.00 could open the gates towards 94.56 and 94.00, respectively.
Goods projector – Gold
After posting its biggest weekly loss since November, gold bulls have come back strong this week.
The precious metal continues to gain strength from a weaker dollar and a slight pullback in Treasury yields, with prices trading around $ 1,826 at the time of writing. Inflation risks could also support the upward gains in gold, which has often been seen as a hedge against rising prices. With inflation surging in the United States in December, this could prompt some investors to hold onto their gold investments.
However, the precious metal is certainly not out of the woods yet. Zero-yielding assets tend to perform poorly in a high interest rate environment. So, with the Fed expected to increase as early as March, the road ahead for the gold bugs could be strewn with pitfalls and obstacles. On top of that, the dollar could regain its momentum on rate hike bets with Treasury yields pushing higher. If that becomes a reality, gold could be in store for more pain on the road.
Technically, the precious metal has the potential to climb towards $ 1,845 if a daily close above $ 1,831 is reached. Alternatively, a drop below $ 1,810 could push prices down towards $ 1,800, $ 1,786, and $ 1,770.