A robust retail sales report emanating from the USA had a notable impact on various financial facets. Wall Street indices experienced losses, US bond yields saw an increase, and the dollar exhibited a slight gain in the initial part of the day. However, the day concluded with the dollar closing at a level comparable to its starting point. During this period, the market readjusted its previously overly optimistic evaluation of potential interest rate cuts by major central banks.
The pound sterling saw a boost following the release of an inflation report. Simultaneously, the price of gold dropped to around $2005, marking its lowest point in over a month. This fluctuation in the market reflects the dynamic interplay between economic indicators and the resulting shifts in various financial instruments.
Presently, contracts related to Fed Fund Futures project a 55% likelihood of a 25 basis points interest rate cut in March. This percentage is significantly lower than the nearly 80% probability recorded just last Friday. Looking ahead to the end of 2024, the market is currently anticipating a reduction of almost 140 basis points, a noticeable adjustment from the figure of almost 170 basis points recorded a few days prior. This shift in market expectations is partially attributed to statements made by representatives of the Federal Reserve.
The prevailing sentiment is characterized by a "hawkish" stance, with policymakers increasingly vocalizing their belief that the market is misjudging the future actions of central banks. While no new information was introduced, the assertive communication from decision-makers is influencing market perceptions regarding the trajectory of monetary policy.
Reacting strongly to the latest data, yields on US debt exhibited notable changes. The 2-year yields saw a rise of 14 basis points, reaching 4.36%, while the 10-year yields increased by 4 basis points, reaching 4.1%. Concurrently, the currency market witnessed an appreciation of the US dollar, albeit at a lesser magnitude compared to the previous Tuesday. The EUR/USD exchange rate established new local minima, momentarily dipping just below 1.0850. As of the time of writing, quotes briefly rose above 1.09; however, the rate is currently situated just below this mentioned level.
A noteworthy development from the previous day was the strengthening of the British pound sterling, a consequence of higher-than-expected inflation readings. The unexpected increase in the Consumer Price Index (CPI) surprised the markets and propelled the GBP/USD pair towards the 1.27 level, eventually reaching and surpassing it.
This publication serves as a reminder to the market that inflationary risks persist and that the ongoing battle against inflation is far from concluded. These market dynamics underscore the intricate and interconnected nature of global financial markets, where economic indicators and policy decisions shape the landscape of investment and trading activities.
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