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In a recent congressional hearing on February 12, Federal Reserve Chair Jerome Powell addressed the House Financial Services Committee, shedding light on the current economic situation and the potential impacts of policies under consideration by Congress and the governmentWhile Powell emphasized the strength of the underlying economy, he noted significant uncertainties surrounding these new policies, stating, “It remains unknown how these policies will perform, and then we will assess what actions we can take.” He hinted that adjustments to tariffs could possibly compel the Federal Reserve to alter its interest rate strategies, highlighting the delicate balance the central bank must maintain in reacting to external pressures while also managing inflation targets.
During the discussion, Powell acknowledged that the latest Consumer Price Index (CPI) data released on the same day came in above nearly all expectations, signifying that while substantial progress had been made in curbing inflation, there is still considerable work aheadThe Fed aims for a long-term inflation goal of 2%, a target that remains elusive despite recent headwayThe implication of maintaining higher interest rates for the foreseeable future was clear, as Powell asserted the Fed’s commitment to navigate the economic landscape responsibly amidst changing circumstances.
The reactions of the financial markets in light of the new inflation report have been notable and profoundExpectations that the Federal Reserve might cut interest rates sooner than later have shifted significantly, with many analysts projecting the earliest reduction could now occur in September 2023, if at allThis marks a considerable revision from earlier expectations that suggested June could see a cutBill Adams, the chief economist at Comerica Bank, emphasized that the vigorous inflation data from January adds to the belief that inflationary pressures remain pervasive and could even justify further postponements of any rate cuts into 2025, demonstrating the Fed's intent to maintain a cautious approach.
In concert with these developments, financial tools such as CME Group’s FedWatch indicate that as of Wednesday morning, the likelihood of a rate cut in March was a mere 2.5%, climbing slightly to 13.2% in May and reaching 22.8% in June
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By July, it anticipated a 41.2% chance of a rate reduction, with September possibly seeing a 55.9% likelihoodNonetheless, the probabilities remain tentative, with market participants predicting that odds for a cut in October may enhance to 62.1% — a reflection of the prevailing uncertainties surrounding both inflation and economic growth.
Amid these developments, there were key economic indicators attracting attentionAmong them was the initial estimate of the UK's GDP year-on-year for the fourth quarter, finalized CPI data from Germany for January, December GDP figures from the UK, monthly industrial output from the UK, and a seasonally adjusted goods trade balance from the UKAdditionally, weekly jobless claims from the U.S. and inflation figures marked by the PPI for January were also forthcoming, all lending critical insights into both domestic and international economic conditions.
Turning to market performances, gold saw a modest rise in value, maintaining a trading range around $2,920. This increase can be attributed to technical purchases positioned around the $2,880 mark, as well as a response to escalating trade conflict concerns from heightened tariff threats from the U.SHowever, the strong CPI data from the U.S. dampened expectations of interest cuts, which subsequently limited gold's rebound potentialMoving forward, traders will likely monitor the $2,940 resistance levels along with a support bracket around $2,900, which could determine the precious metal's short-term trajectory amidst mixed signals from the underlying economy.
The dynamics of the U.S. dollar against the Japanese yen also reflected significant fluctuations as the dollar/yen pair rebounded sharply, trading around $154.30. This resurgence can largely be attributed to brief short covering alongside Powell's hawkish tone that lessened prospects of impending rate cuts by the FedKey focus points will include potential pressure near the $155.00 mark, as well as established support closer to $153.50 should the pair experience further corrections.
Similarly, in the forex market, the dollar/Canadian dollar pair showed signs of upward mobility
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