Market sentiment has drastically changed, following the release of US macro data.
The consumer inflation report, published on Thursday, logged a noticeable slowdown in annual figures. The inflation rate dropped to 7.7% from 8.2% on a yearly basis, down from the forecast of 8.0%. On a monthly basis, the index was unchanged from a 0.4% rise in September.
The results triggered market jitters and boosted demand for stocks amid a significant correction in US Treasury yields and a plunge in the greenback.
What could cause such a market reaction to the US inflation results?
Investors see a slowdown in inflation as a reason for the Fed to change its stance on interest rates or even stop raising them altogether next year in order to assess the cumulative effect of aggressive increases in borrowing costs in 2022.
Investors assume a reversal in the Fed's interest rate stance is quite possible. Yesterday, San Francisco Fed President Mary Daly said that inflation was a lagging indicator and that there was a risk of overtightening. Meanwhile, her colleague Loretta Mester, the president of the Federal Reserve Bank of Cleveland, advocates for more aggressive rate hikes as inflationary pressure remains strong. In any case, the Fed may soon change its monetary stance due to the confrontation of opinion of its policymakers.
What to expect in the market in the short term?
The rally that started in the equity market on Thursday is likely to continue today and next week. With company stocks noticeably overbought and the NASDAQ's constituents in quite a terrible state, the US dollar may continue falling if demand in the US Treasury market grows. This would exert pressure on Treasury yields.
This is the likely scenario for today. This is what continuing growth in US and European stock futures indicate at least.Outlook:
XAU/USD
Following yesterday's rally, gold is consolidating below 1760.30. The price may increase after a bearish correction to 1742.40 or a breakout through 1760.30, with a target at 1774.00.
USD/CAD
The pair's downward movement stopped below 1.3365. If a bearish correction to 1.3365 occurs, the quote may pull back to 1.3225.
