Charts in Action: Inflation Update, Technical Outlook, Edition #210 (28/04/2022)
US stock markets lead the way as the fight against inflation heats up 🔥 Read the latest technical analysis covering major Indices, Precious Metals & Cryptocurrency 👇
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Interest rates set to rise, Crypto eyes off with US indices
With domestic inflation running hot, we turn our attention now to the official response from policymakers.
The markets fell lower as they digested the possibility of a deviation from the US Federal Reserve's dot plot timeline. At present, the world's most influential central bank intends to follow a trajectory of hiking rates by 25 basis-point (bp) increments at the end of every Federal Open Market Committee (FOMC) meeting until year's end.
Source: Summary of Economic Projections released on 16 March 2022, United States Federal Reserve
In theory, this plan of attack from Fed officials will see the key cash rate at 1.9% by the end of 2022—which is back at pre-pandemic levels and is not considered restrictive on economic development.
However, interest rates above 3% will be an entirely different story.
Note that 2.9% is the intended key cash rate by the end of 2023...
So, what could higher interest rates mean for markets and their participants?
Should Fed Chairman Jerome Powell (JPOW) escalate efforts to combat inflation and signal more aggressive rate adjustments to this timeline, then financial markets would undoubtedly reduce the impact of this uncertainty on their portfolios.
For example, a ramping up of rate hikes by 25bp to 50bp.
JPOW has recently avoided ruling out the possibility of a 50bp rate hike in May following the latest month-on-month CPI (consumer price index) figures which show little signs of slowing inflation—versus a previously expected 25bp rise in rates.
Study the US CPI historical chart above. The last time inflation ran this high was over 40 years ago. As a result, interest rates were nearly 20% to counteract the economic instability caused by a rapidly devaluing Dollar.
In addition, it is worth acknowledging that the Reserve Bank of Australia looks to be planning a 'catch-up' by raising rates in the coming days and over the subsequent months ahead.
As the Sydney Morning Herald reports:
"Markets believe the RBA, which meets on Tuesday, will take the cash rate from 0.1 per cent to 0.25 per cent."
Many asset markets appear in correlation with the US indices for the time being. Let's examine this relationship forming on the price charts below.
Dow Jones Industrial Average, US30 - 4 Hour (H4)
US Tech Nasdaq 100, US100 - 4 Hour (H4)
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Gold Spot vs. US Dollar, XAU/USD - 4 Hour (H4)
Silver Spot vs. US Dollar, XAG/USD - 4 Hour (H4)
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Bitcoin vs. US Dollar, $BTC - 4 Hour (H4)
Ether vs. USD, $ETH - 4 Hour (H4)
Correlations. Correlations everywhere!
It appears asset classes across the spectrum, both risk-off and risk-on, are in the throes of a hard selldown against the US Dollar. Ultimately, this response in prices comes at little surprise after a hawkish JPOW announced that a 50bp hike on interest rates is not off the cards for May.
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As the markets digest and attempt to price in this new information, technical practitioners may look for the US stock indices to move first.
Decisive action should set the tone for sentiment to follow through and guide price direction. The latest technical analysis suggests that price action looks to be gaining momentum around major levels of support and is pressing against trend resistance.
Should US indices break in either direction, expect the other assets charted above to follow suit...
See you again for the next update.
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