​​​​​​​Global Markets Tread Lightly Amidst Divergent Cues: Inflation and Interest Rate Talks Prevail | Daily Market Analysis

Key events:

• USA - Core PCE Price Index (MoM) (Jan)
• USA - Core PCE Price Index (YoY) (Jan)
• USA - Initial Jobless Claims     
• USA - Chicago PMI (Feb)

On Wednesday, the S&P 500 experienced a slight decline, but the broadening rally beyond the technology sector helped mitigate losses as investors awaited crucial inflation data that is expected to influence the Federal Reserve's stance on interest rates.

The Dow Jones Industrial Average slipped by 23 points, representing a 0.1% decrease, while the S&P 500 registered a 0.2% dip, and the NASDAQ Composite saw a 0.6% decline.

The US Dollar Index has retreated to 103.85 after reaching weekly highs of 104.25 in early European trading on Thursday. Investors are eagerly anticipating the release of the US Core Personal Consumption Expenditures Index for January, which is scheduled for later in the day. This report is expected to provide insights into the trajectory of inflation in the United States and may induce market volatility.

On Wednesday, data from the US Bureau of Economic Analysis revealed that the country's Gross Domestic Product for the fourth quarter (Q4) expanded at a 3.2% annualized rate. Although slightly below market expectations and the previous reading of 3.3%, the figure still indicates a solid economic performance.

In recent weeks, several Federal Reserve members have expressed the need for additional evidence of inflation data before considering any shifts in the monetary policy stance. Addressing the monetary policy, Boston Fed Bank President Susan Collins emphasized the importance of a cautious approach, suggesting that the Fed should take time to assess data before contemplating any policy changes. This approach aims to ensure the fulfillment of both central bank mandates: achieving maximum employment and maintaining price stability.

Furthermore, New York Federal Reserve President John Williams indicated that although there is still some ground to cover in reaching the Fed's 2% inflation target, the possibility of rate cuts this year is on the table, contingent upon the incoming data.

The hotter-than-expected Consumer Price Index data has led investors to adjust expectations, pushing back the timing of the first rate cut. Currently, the markets have priced in 80 basis points (bps) of rate cuts for the year, down from 175 bps around mid-January.

Apart from that, the Australian Dollar has rebounded following the release of Australia's Retail Sales and Private Capital Expenditure data on Thursday. The S&P/ASX 200 Index recovery from daily losses provided support to the Aussie, although the equity market's mixed performance contributed to selling pressure.

The Japanese Yen has strengthened, receiving a boost from a fresh intervention warning and hawkish comments by Bank of Japan board member Hajime Takata. The generally weaker tone in equity markets has further favored the safe-haven JPY. However, the USD/JPY pair has dipped to over a one-week low, dropping below the psychological mark of 150.00.

While a potential recession in Japan might lead the BoJ to postpone plans for tightening monetary policy, the Federal Reserve is expected to wait until June before considering interest rate cuts, given the persistently sticky inflation and the resilience of the US economy. This could act as a supportive factor for the USD and limit losses for the USD/JPY pair.

The GBP/USD pair continues to build on yesterday's recovery from the weekly low and experiences additional buying interest during the Asian session on Thursday. Current spot prices are trading above the mid-1.2600s, finding support from a slight downtick in the US Dollar, although the bullish momentum remains subdued.

In the backdrop, Bank of England policymakers are resisting market expectations for early interest rate cuts. Deputy Governor Dave Ramsden emphasized on Tuesday that he requires more evidence of easing inflationary pressures before contemplating a rate cut. Echoing this sentiment, BoE's Catherine Mann mentioned on Wednesday that the spending habits of affluent Britons pose challenges in curbing inflation. Despite these statements, the market appears convinced that the BoE will initiate interest rate cuts soon, potentially creating headwinds for the GBP/USD pair.

Given the current fundamental landscape, it is advisable to await robust follow-through buying signals before committing to the continuation of the GBP/USD pair's two-week-old uptrend. No significant market-moving economic data is scheduled for release from the UK on Thursday, leaving spot prices susceptible to USD price dynamics. In addition to the crucial US inflation data, the US economic calendar includes the usual Weekly Initial Jobless Claims, the Chicago PMI, and Pending Home Sales. These, along with any remarks from the Federal Reserve, are likely to impact USD demand.