S&P and Dow Dip as Inflation and Central Bank Decisions Take Center Stage | Daily Market Analysis

Key events:

• USA - Core CPI (MoM) (Nov)
• USA - CPI (YoY) (Nov)
• Canada - BoC Interest Rate Decision
• USA - Crude Oil Inventories
• USA - 10-Year Note Auction

The S&P 500 marked its second consecutive day of losses as the tech sector continued to struggle, overshadowing a strong performance by Alphabet. This comes as investors brace for key inflation data, which could shape expectations for future Federal Reserve actions.

The Dow Jones Industrial Average dropped 142 points, or 0.3%, alongside a similar 0.3% dip in the S&P 500 and a 0.2% decline in the NASDAQ Composite.

Oracle faced a significant setback, plunging more than 6% after its fiscal Q2 earnings fell short of lofty Wall Street expectations, a reflection of intensified competition in the cloud computing sector. Meanwhile, Alphabet proved a rare bright spot, surging over 5% following the launch of its Willow quantum chip, signaling strides in advanced computing technology.

In the currency market, the Japanese Yen gained modestly during Wednesday’s Asian session, dragging the USD/JPY pair away from its nearly two-week high. Despite these gains, the Yen’s bullish momentum was tempered by mixed signals from the Bank of Japan regarding a potential interest rate hike in December.

Recent data, including a 0.3% monthly increase in the Producer Price Index and a 3.7% year-over-year rise, combined with the fastest wage growth since 1992, suggest that inflationary pressures in Japan are building. However, differing views among BoJ officials have introduced significant uncertainty. While Governor Kazuo Ueda hinted that the timing of the next rate hike is approaching, dovish voices, such as BoJ board member Toyoaki Nakamura, have emphasized the need for caution in tightening monetary policy. This divergence has left traders hesitant to make strong directional bets on the Yen.

The EUR/USD pair struggled for the fourth consecutive day, trading around 1.0530 during the Asian session. The Euro remains under pressure as the US Dollar benefits from safe-haven demand ahead of the US Consumer Price Index release later in the day. Traders are cautious as the inflation data could shape market expectations for future Fed rate decisions.

Meanwhile, in the Eurozone, attention is focused on the European Central Bank’s upcoming policy announcement on Thursday. Analysts widely expect a 25-basis-point rate cut, with the Main Refinancing Operations Rate projected to drop from 3.4% to 3.15% and the Deposit Facility Rate expected to decrease from 3.25% to 3.0%. This potential policy easing has added downward pressure on the Euro, complicating its recovery against the Dollar.

The USD/CAD pair showed minor losses during the Asian session but remained near its highest levels since April 2020. Traders are awaiting the release of US inflation data and the Bank of Canada’s policy decision to determine the pair’s next move. Rising crude oil prices have provided some support to the Canadian Dollar, given Canada’s reliance on oil exports. However, market sentiment remains cautious amid speculation about a potential rate cut by the BoC. If the central bank opts for a more aggressive easing policy, it could limit gains for the Canadian Dollar despite the support from higher oil prices.

The Australian Dollar remained under pressure against the US Dollar on Wednesday, recovering slightly after losses in the prior session. The AUD/USD pair faced challenges as the US Dollar strengthened broadly ahead of key inflation data expected later in the day. Analysts predict that the US Consumer Price Index for November will show a year-over-year increase to 2.7%, up from 2.6% in October. Core CPI, excluding volatile components like food and energy, is forecasted to hold steady at 3.3%. If the inflation data surprises to the upside, it could reduce the likelihood of a Federal Reserve rate cut, further boosting the Dollar and weighing on the Australian currency.

Adding to the AUD’s challenges, the Reserve Bank of Australia recently decided to keep its Official Cash Rate at 4.35%, citing eased inflationary pressures but remaining cautious about potential risks. Governor Michele Bullock emphasized that the central bank will continue to closely monitor economic indicators, particularly employment figures, before making future policy decisions. The combination of external and domestic factors has left the Australian Dollar vulnerable to fluctuations in market sentiment, as traders assess the implications of upcoming data releases on monetary policy in both the US and Australia.

As global markets remain on edge, the interplay of inflation data, central bank decisions, and broader economic trends will continue to drive volatility across asset classes. Investors are increasingly looking for clarity on the direction of monetary policy, making the upcoming data and announcements crucial for shaping market sentiment.