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Fed Rate Hikes May Be Over As Cooling Inflation Eases Pressure On The Dollar

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Harvest Global Markets :

On Thursday 13 April 2023, the dollar stayed low during Asian trade following its overnight decline caused by the U.S. inflation data, which was lower than expected .This has led to speculation that the Federal Reserve’s monetary tightening might conclude next month with a final interest rate spike.

Last month, the Consumer Price Index(CPI) increased by 0.1% (Forecasted 5.1% vs Actual 5.0%) which was lower than the 0.4% increase(Forecasted 6.4% vs Actual 6.0% ) in February. The increase was mitigated by a reduction in gasoline prices, while rental costs rose.

The dollar index, which gauges the currency against six primary counterparts, experienced a 0.6% decline because of CPI data and it was on the verge of reaching a new low of two months earlier during the Asian session before recovering some of its losses.

According to analysts, the data indicates that the fundamental demand within the US economy is still strong enough to maintain inflation above the Federal Reserve’s target of 2%.They believe that this not only emphasizes the requirement for an additional rate hike, but it also does not imply that the outlook for domestic demand is about to weaken under impending credit restrictions and a decline in consumer confidence.

Mary Daly, the President of the San Francisco Federal Reserve Bank, stated that although the strength of the U.S. economy, tight labor market conditions, and high inflation indicate the need for the Fed to raise rates further, he also indicated that forth coming tighter credit conditions could make a case for a pause, this statement matched with the analyst’s belief.

The minutes from the Federal Reserve’s March meeting on 12 April 2023 revealed that a few policymakers debated halting interest rate hikes after two regional banks’ collapse, but ultimately agreed that the high inflation rate needed to be addressed. Furthermore, the minutes presented the staff’s predictions of a minor recession in the latter part of this year.

In March 2023, the Fed increased interest rates by 25 basis points (4.75% to 5%). The current market expectations suggest a 70% probability of another 25 bps hike on 3 May, followed by a decrease in rates towards the end of the year.

Now, the investors are looking forward to retail sales data releasing on Friday 14 April 2023 at 1730 HRS PKT in order to evaluate the impact on consumer spending.

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