Hopes that the Fed may not only hit the pause button on interest rate hikes by May but even stop this process soon, continue to fade.
Considering the current situation in the markets, it can be assumed that investor expectations of an early end to the Fed's aggressive monetary policy cycle have been largely dashed. This can be attributed to the latest data on US consumer inflation. The January figures showed a slowdown in its decline. This in turn spurred fears that inflation might not only stop falling but even resume growth. Even Fed Chair Jerome Powell's comments on signs of the disinflationary process failed to improve investor sentiment. The statements of other Fed officials about the need to keep raising interest rates only added to the negative mood.
Against this background, Treasury yields returned to the levels seen in late December. This indicates that market participants have increasingly high expectations of further interest rate hikes in the United States.
How will this sentiment affect the markets?
As long as there is a real risk that the US Federal System will continue to lift rates aggressively, demand for risky assets will remain under strong pressure. In our view, the situation may either change for the better or worsen due to US inflation data to be published in March. If data shows a resumed cooling in inflation both in monthly and annual terms, risky assets will most likely see a local rally amid lower Treasury yields and a weaker dollar. At the same time, if the figures are similar to the January ones, with annual inflation slightly easing or stabilizing at the previous level and its monthly value increasing again, the regulator will probably raise the key rate by 0.25%. At least, this can be seen by the dynamics of Fed fund futures. In this case, the dollar will have every chance of gaining strong upside momentum, and US stock indices will stop consolidating in a wide range but rush to the lows posted in December last year.
What to expect from the market today?
Given that ahead of the Fed minutes as well as a number of important macroeconomic indicators to be released this week, the prevailing market mood is negative, it can be assumed that stock indices will continue to decline, while the dollar may gain value against major currencies.
Outlook:
EUR/USD
The pair is trading at 1.0665. Coming under pressure from falling demand for risky assets and negative market sentiment, the pair is expected to break through 1.0665 and then slide to 1.0575.
AUD/USD
The pair is currently testing the level of 0.6875. If the price falls below it, the pair will most likely head towards the area of 0.6800, weighed down by falling demand for risky assets.
