- UK inflation unexpectedly remains at 4.0% and Core Inflation data also read lower than expectations causing the Pound to decline.
- US inflation declines but at a weaker pace compared to expectations. US inflation falls from 3.4% to 3.1% (previously expectations were for inflation to fall to 2.9%).
- The best performing currency as we edge towards the European Cash Open is the Australian Dollar, followed by the Japanese Yen.
- The NASDAQ witnesses its largest daily decline in February due to the inflation rate pushing back hopes of an early rate cut.
USA100 – Core Inflation a Concern for the Fed and Investors!
After the release of January’s inflation rate and core inflation data, the USA100 as well as all US indices fell rapidly. When evaluating each component within the NASDAQ, only 6% of the index were able to hold onto their value. All stocks which held more than a 0.50% weight in the index depreciated. The reason for the decline was not that the inflation rate is “too high” or that interest rates cuts are not likely. Instead, the decline is due to investors now believing a cut in March is indeed not possible.
According to analysts, the inflation rate does not indicate any danger to the US economy, nor does it indicate there is any reason for a large lasting decline in US stocks. However, the news can weaken demand in the short term. Again, economists advised the inflation rate is not high, but simply higher than the over-optimistic expectations, and that cuts are still likely in the second quarter of 2024.
The short-term price condition of the index will largely depend on upcoming earnings reports from Cisco and Applied Materials. The two stocks make up 2.70% of the index and if these earnings read higher than expectations, it can reassure investors amid concerns. Cisco has beat earnings per share expectations consecutively over the past 12 months as has Applied Materials.
Investors’ main concern yesterday was the Core Inflation data which continues to prove difficult to tackle. Core inflation does not include products related to food and the energy sector. The monthly Core Inflation Data read 0.4%, the highest since May 2023. But slightly easing concerns is inflation elsewhere falling; the UK inflation remains at 4.0%, Chinese inflation fell as did Swiss inflation. The Producer Price Index will now be vital for investors. If the PPI reads higher than expectations, investors’ concerns could grow and the USA100 could form a correction instead of a smaller retracement.
On the daily chart, a retracement would mean a further decline between 1.89% to 4.40%, whereas a full correction would mean a 6.30%-8.00% decline. Currently the two-hour chart indicates an upward price movement towards the 75-bar exponential moving average. However, investors should note this will largely depend on earnings data, the US Retail Sales and Friday’s PPI release.
GBPUSD – The Pound Gives up Gains after Lower Inflation Data
The exchange rate continues to trade below major trendlines for a second day after stronger US inflation and weaker UK inflation. The possibility of the Bank of England opting for a rate cut first, or within the same month as the Federal Reserve grows. However, this will depend on upcoming data from the UK over the next 48-Hours.
The UK is scheduled to release their Monthly GDP and Retail Sales on Friday. If both read lower than expectations, the possibility of an earlier rate cut by the Bank of England rises. The UK’s Gross Domestic Product is believed to have declined by 0.2%, which would be the third decline in 6-months.
Technical analysis also indicates a downward trend. The price of the exchange trades below the 75-bar EMA and below the neutral on the RSI. On the 5 and 15-minute timeframes, the asset is also forming downward crossovers. These three factors indicate further bearish price movement and the Fibonacci indicates the price can fall down to 1.24990.
Michalis Efthymiou
Market Analyst
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