That very day has come, the dollar has collapsed against a basket of competitors by 2%. Not only has inflation slowed, but it has surpassed analysts’ forecasts. Traders took the declining inflationary pressure as a signal that the rate hike cycle was coming to an end and began to build up to a smaller monetary move by the Fed in December.

This begs the question: are markets really on the cusp of a change in Fed policy and, as a consequence, a change in the trend of the dollar? Markets will take today’s news positively, which should help bonds, stocks, and be a headwind for the dollar in the short term. 

Only traders who follow the trend are profitable with MT5 forex trading companies. This fact is no secret to anyone. If you look for constant reversal points, there is not much to be gained from it. It’s easier and more profitable to follow the direction of the main motion. Unfortunately, trends are not always present in the markets, so sometimes you have to wait for them to appear and stay in the cache for a long time (months).

What’s next?

Looking ahead, it is worth noting that a good indicator alone can’t fix the whole situation. Traders should draw the right conclusions from Thursday’s news. Obviously, this is not the end of the Fed’s fight against inflation.

As noted by HSBC, the U.S. regulator will continue to tighten policy and is unlikely to give up on its target of raising it to 5% or higher. Here, the Central Bank may hold it for an indefinite period. It could be all of 2023, or even longer.

When will the tension in the markets go away? 

Only when the Fed completes its rate hikes and the global economy shows signs of stabilizing will it be possible to relax. Market players are paying particular attention to the details of the report now, noting the slowdown in inflation across a broader spectrum. These include: 

  • Lower used car prices;
  • Declines in some transportation services;
  • Lower prices for medical services;
  • Smaller increases in equivalent rents for owners.

Food price inflation also slowed, but monthly energy price inflation accelerated. Inflation may indeed have passed its peak, but it would be a mistake to wait for it to end. 

Recent data show that wage growth is trending downward, while job creation has also peaked. Economists and analysts will now turn their attention to the December jobs and inflation reports, which will be the last important data the Fed will consider before its December decision.

If the current message of lower inflationary pressures holds true, there is much to be said for a Fed slowdown. For now, the baseline scenario is 50 basis points at the next meeting on December 13-14. Even smaller moves should be expected in early 2023.

By Sia