The CPI for October, far from calming concerns, worsened the inflation figures by showing an increase in prices for another month, with an interannual figure of 6.2%, the highest in decades. The core figure which is the change in the cost of goods and service came at 4.6%, levels not seen since the beginning of the '90s.
If the Fed continues to look at inflation as a transitory phenomenon, it will be facing many issues, even more so when the forecasts of economists and economic institutions predict that the increases in price levels will continue throughout the next year.
The Fed Funds contracts are anticipating higher interest rates for next year of at least 0.50%. In reality, the Fed is at a crossroads with a complicated decision; although inflation pushes towards higher interest rates, the uncertainty about the evolution of the economy due to a possible slowdown in the economy leads it to delay the tightening of monetary policy.
Yesterday, the reaction in the market was in the opposite direction compared to what the Fed announced lately. The Fed was against hiking interest rates and not taking into account high inflation, however, the market didn’t see it as such, and the reaction was to sell bonds, to buy Dollars and sell stock indices.
The Nasdaq technology index was the one that experienced the most pronounced decline, with a fall of 1.48% at the close of the session. The shares of technology companies are those that, in principle, would be most affected by a tightening of financing conditions given their high level of indebtedness.
After reaching high overbought levels, the Nasdaq has corrected downwards, forming a bearish divergence in the weekly RSI and with support at the 15.650 zone, which is the 38.2% Fibonacci retracement of the last bullish leg and coincides with the high of early September.
The US Dollar experienced a new upward momentum as market interest rates rallied, which brought the EUR/USD pair to its lowest levels of the whole year.
The pair has broken away from the 100-week SMA line, around which it had moved in the last five weeks and, for the first time, has traded below 1.1494 which is the 50% Fibonacci retracement of the entire bullish leg that runs from April 2020 to January 2021 and paves the way to the next level located at 1.1295.
Sources: Bloomberg, Reuters