The latest inflation reports in the United States have delivered a surprising surge, surpassing economist expectations and potentially complicating the Federal Reserve's plans for the start of interest rate cuts.
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In February 2024, the Consumer Price Index (CPI) climbed by 3.2% compared to the previous year, slightly higher than January's 3.1% rate and exceeding the anticipated 3.1%. This extends the U.S. annual inflation rate's persistent trend above the Fed's 2% target for the third consecutive year.
On a monthly basis, inflation rose by 0.4%, in line with forecasts but showing acceleration from the preceding month's 0.3% pace.
The primary drivers behind February's inflation surge were both energy prices, which soared by 3.6% compared to the previous month, marking the highest increase since August of the prior year, and shelter, up 0.4% on the month.
Core inflation, which excludes volatile energy and food prices, moderated from 3.9% in January 2024 to 3.8% in February 2024, surpassing the anticipated 3.7%.
Monthly core CPI also saw a 0.4% increase, maintaining pace with January's figures and surpassing the predicted 0.3% uptick.
On the producer front, the Producer Price Index (PPI) accelerated by 0.6% on a month-on-month basis in February, well above the expected 0.6%. Annually, the headline PPI saw a 1.6% increase, surpassing January's 0.9% and exceeding the anticipated 1.1%.
Market Reactions: Dollar Rallies, Gold Takes A Breather
In the FX market, the dollar saw a minor increase shortly after the consumer inflation report was released, as indicated by the DXY index rising to the 103 level before reversing its gains by Thursday. Following the PPI report surpassing expectations, the dollar demonstrated a stronger surge, with the DXY index decisively breaking above the 103.30 levels, reaching highs not seen since March 6th.
Chart: Dollar Rallied Post PPI Report
On the rates front, the sensitive 2-year yields surged to 4.70%, marking a high not seen since late February. Meanwhile, 10-year yields edged higher to 4.29%, similarly reaching monthly highs.
Market participants dialed back interest rate expectations, particularly following the PPI release.
At present, traders are assigning a 60% likelihood of a Fed rate cut by June and incorporating a total of three rate reductions by the conclusion of 2024, according to the CME Group Fed Watch tool.
The increase in Treasury yields and the strengthening of the dollar put a stop to the rise in gold prices, leading the precious metal to end a streak of nine consecutive sessions of gains this week.
Gold prices declined by 1.1% on Tuesday following the CPI report and by 0.6% on Thursday after the PPI report.
Gold Upsurge Faces Inflation Roadblocks
How Might The Inflation Data Influence The Next Fed Meeting?
The unexpected surge in inflation rates for February, coupled with a similarly robust trend observed in January, is likely to stir greater concern among Federal Reserve policymakers regarding their plans for interest rate cuts.
In recent public statements, Fed Chair Jerome Powell reiterated that any monetary easing hinges upon further confirmation of the disinflation trend toward the targeted 2%.
Undoubtedly, this inflationary report does little to bolster the Fed's confidence in asserting that price pressures are moving steadily toward the desired target. Consequently, it could complicate the outlook for interest rate cuts in the months ahead.
With the Fed set to convene in a week, the market anticipates a decision to maintain the current interest rates within the range of 5.25% to 5.50%. However, all eyes will be on the updated macroeconomic projections.
Based on the latest forecasts from December 2023, the Fed envisioned three rate reductions in 2024, followed by four in 2025. Projections suggested that PCE inflation would hit 2.4% in 2024, 2.1% in 2025, and ultimately stabilize at the 2% target by 2026.
Given the recent uptick in inflation reports, there's a growing possibility of upward revisions to these inflation estimates and potentially fewer anticipated rate cuts by FOMC participants.
US Dollar Index (DXY) Analysis: Awaiting FOMC Meeting
The higher-than-expected inflation reports for February have provided a boost to the U.S. Dollar Index (DXY), which is now approaching its key moving averages ahead of the upcoming Fed meeting.
The greenback is targeting the 50-day moving average at 103.54, followed by the 200-day average at 103.69, which aligns with a declining wedge pattern that began last month.
The U.S. Dollar Index (DXY) may consolidate around the levels of 103.30-103.70 leading up to the FOMC meeting.
If the Fed adjusts its rate cut projections downward, suggesting fewer rate cuts than initially anticipated in December, the dollar could potentially rally to 2024 highs around the 105 level.
Gold Price Analysis: Prudence Amid Overbought Levels As Traders ‘Wait And See’ The Fed
Gold prices have demonstrated a clear upward trend since mid-February, with the $2,150/oz area—marking the breakout of December 2023’s highs—now acting as a support level.
However, two inflation reports exceeding expectations have posed challenges for further bullish extensions, as the resurgence of the greenback and the uptick in Treasury yields exert a gravitational pull on the precious metal.
Despite these adverse developments, gold prices have exhibited notable resilience against bearish forces, indicating that bullish momentum remains intact.
Nevertheless, with RSI levels deeply overbought, prudence is advised before initiating new bullish positions here, as traders will likely prefer to adopt a 'wait and see' approach ahead of the Fed meeting next week.
If the Fed opts for a hawkish stance by signaling fewer rate cuts for this year and 2025, gold could potentially retrace nearly half of the February-March rally, potentially dipping below $2,100/oz.
Conversely, if rate cut projections remain unchanged, it would affirm the continuation of the bullish trend, albeit possibly at a slightly moderated pace compared to the recent rally, on the expectation of lower interest rates in the future.
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