Within the first two days of the week, investors experienced very little volatility as there was little direction in the market. It made it slightly tricky for traders looking to trade trends.
However, as mentioned earlier in the week, most investors had held back trades until the market obtained further clarity on inflation. The CPI increased from 0.3% to 1.0% and then a whopping 1.3% every month.
It was expected that the inflation rate would be much lower this month, as it is unusual for the U.S. economy to continue seeing such high rates month over month.
The inflation rate was predicted to have increased by 0.2% - 0.3%, but the figure came in at 0.0%. This CPI monthly figure is the lowest we have seen in almost two years.
Also, all market participants have noticed that fuel prices, which weigh heavily on inflation, have decreased significantly over the past month.
The U.S. dollar declined against most major currencies immediately after the release. Its decline averaged around 1.30% within only 3 hours. The stock market also saw strong price movement, but, unlike the USD, it was positive.
The NASDAQ increased by 2.85% and the S&P 500 by 2.13%. The NASDAQ is now at its highest since May 1.
Oil prices saw mixed movement but remained within the latest price range. At first, the bears held the upper hand, dropping the price to $87.14 per barrel. Later, though, that level was rejected, and it rallied quickly.
Overall, the price ended the day higher and is currently hovering at $91.19 but continues to show signs of bearish volatility.
USD/JPY - Technical View
As with most pairs, the USD/JPY saw a strong breakout after the release. However, the USD/JPY had virtually seen no volatility throughout Monday, Tuesday, and Wednesday. Other currency pairs experienced volatility but not much direction.
The market participants were waiting for further clarification on inflation before placing their positions.
The U.S. dollar declined by 2.19% within the first few hours of the CPI release. The significant decline had increased the level of demand. As sellers started closing their profiting positions, the price moved into a retracement.
The retracement measures 31% of the previous price movement and has formed two higher waves, with the price lows also remaining higher. Nonetheless, the price remains very low and is potentially exposed to more sellers.
The Consumer Price Index has triggered many sell positions in the market. Participants believe that a lower level of inflation may potentially result in the Federal Reserve taking a more dovish stance, specifically after the previous Fed meeting had confirmed that the rate hikes had not yet affected the market. Traders wonder if the Fed may take a “wait and see” stance.
Therefore, the Federal Reserve’s response to inflation, which has now dropped from 9.1% to 8.5%, will be closely monitored. Despite growing by 0.0% in July, the inflation rate is still very high and more than the Fed’s 2% target. On the other hand, it should be noted that the Fed may not take a dovish stance as the market seems to expect.
Most analysts have advised that inflation is still too high, so tightening the monetary policy will continue. The regulator may still increase the interest rate by 0.75% during their next meeting.
The President of the Minneapolis Federal Reserve had already come out after the inflation figures to confirm his point. Mr. Kashkari advised,
“It is unrealistic to believe that we will cut interest rates any time soon when it looks certain that inflation will remain higher than our target well into 2023.”
The market will, of course, continue monitoring the Fed members’ personal opinions.
NASDAQ - Technical View
NASDAQ rallied 2.85% within trading hours and a further 0.70% during this morning’s futures market. The increase was triggered by the lower inflation and news that petrol prices had declined within the previous month, hopefully increasing consumer confidence levels.
Whether the market will be able to continue its upward trend will depend on the Fed’s response as well as general economic performance.
One of the most successful stocks was Walt Disney Company (NYSE:DIS) which released its quarterly earnings report for the previous quarter. Disney stocks rallied by more than 6%, reaching their highest since April.
The report confirmed that Disney added an additional 4 million subscribers, exceeding market expectations. The company also beat its profits and Earnings per Share (EPS) expectations.