In the past 24 hours, the market saw the highest volatility levels of the year. Significant price movements were experienced across different asset groups but were all triggered by the Consumer Price Index (CPI) released in the US.
It was predicted that the CPI figure would decline for the first time in over two years. However, the figure remained in the positive while the Core CPI came in double the expected figure.
The economic release saw strong price movements on all US Dollar pairs, US stocks, and correlated instruments such as gold and oil. But why was such a strong price movement triggered?
USD/JPY - Technical View
USD/JPY has declined by 0.60% during this morning’s Asian session but remains higher than yesterday’s price open. The pair saw one of the largest spikes across major currency pairs, increasing by 239 PIPs within an hour.
Taking into consideration the size of the bullish price movement, today’s retracement is understandable. However, after yesterday’s developments, the instrument may potentially be influenced by two opposing factors.
What factors could potentially support the Japanese Yen? During this morning’s Asian session, the finance minister has been very public about his dissatisfaction with the Yen's depreciation and its potential harm to the economy.
Japanese finance minister Mr. Suzuki advised that currency intervention was among the options the government would consider in combating the decline. Of course, this is a rare occurrence in economics, and the effect on the Yen and the economy cannot be certain.
However, this is something that traders will monitor and consider when analyzing. Bloomberg believes the intervention will be initiated if the exchange rate increases above 145.00.
However, the price is, of course, mainly driven by the US Dollar. The US Dollar Index has increased to 109.80, which is the highest of the week so far.
Even when the Dollar was weakening earlier in the week, most analysts favored a stronger Dollar in the longer term. According to economists, the price movement was primarily triggered by sizable market participants, such as hedge funds.
The inflation rate has decreased to 8.3%, which is the lowest since April but did not decline to 8% as expected. At the same time, the Core CPI remained extremely high, showing that inflation remains stubborn.
If we were to remove food and gasoline from the metric, the inflation rate might be much higher than the illustrated 8.3%. This has resulted in most analysts believing that the Fed will opt for a 75 basis point hike.
NASDAQ - Technical View
NASDAQ saw the biggest decline of the US leading equity indices. It declined by a whopping 5.80% compared to the Dow Jones Industrial Average, which declined by 4.01%, a substantial difference in price action.
What is also a concern for traders is that all previous gains from the past four sessions have been knocked off. The most significant declines were experienced with NVIDIA (NASDAQ:NVDA) Stocks and Meta Platforms Inc (NASDAQ:META). No stocks within the index recorded a price increase.
The price is now hovering around the previous month’s low and has also slightly declined during this morning’s futures market. The issue with the US stock market is the drop in investor confidence after such a substantial decline and the herd mentality, which plays a significant role in the market.
A lower risk appetite may further pressure the market, and it looks like the Federal Reserve may keep hiking. Most economists have priced in a 75 basis point hike.
However, former Treasury Secretary Larry Summers has advised that a 1% rate hike may be needed. This would apply significant pressure to the economy and stocks.