The latest U.S. Consumer Price Index (CPI) report has brought inflation back into the spotlight. After a near-8-month low, inflation rose to 2.6% in October. Core inflation, which strips out food and energy costs, has remained steady at 3.3%.
This shift in inflationary pressure has traders on edge, especially with the Federal Reserve’s upcoming decision on interest rates looming large.
With inflation still above the Fed’s 2% target, there’s growing speculation that the central bank may have miscalculated its approach to rate cuts.
Since September, the Fed has been easing its monetary stance, dropping the Fed Funds rate from 5.5% to 4.75%. Many market participants are betting on another cut to 4.5% in December.
Before the latest CPI report, the odds for a 0.25% cut stood at 60.3%. But following the news, those odds surged to 82.5%, reflecting growing belief that inflation hasn’t risen enough to stop the Fed from continuing its easing cycle.
If the Fed continues on its path of aggressive rate cuts, it may risk further inflationary pressure in 2025, potentially stoking an accelerated rise in inflation next year.
These concerns are particularly heightened by the ongoing market uncertainty about fiscal policies proposed by political figures, such as former President Donald Trump’s plans to enact further tax cuts, impose higher tariffs, and take a hard stance on immigration.
While the timing and magnitude of these policies remain unclear, they could potentially contribute to stronger inflationary trends over the next few months.
Yet, this brings up an important question: what happens next? If the Fed cuts rates too aggressively, there’s a real risk of fueling inflation further down the line, particularly in 2025.
This risk becomes even more pronounced when you consider the possible economic policies that could be coming, including tax cuts, higher tariffs, and stricter immigration measures proposed by political figures like Donald Trump.
While the exact timing of these measures remains unclear, they could contribute to even stronger inflationary trends, complicating the Fed’s efforts.
The market’s response to these developments has been swift. Investors, wary of rising inflation, have begun selling off government bonds, causing borrowing costs to climb. This has reversed some of the positive effects of the Fed’s recent rate cuts, and mortgage rates, in particular, are starting to rise again.
Meanwhile, the U.S. Dollar has continued to gain ground, bolstered by expectations of further rate cuts in 2025. This stronger dollar, combined with rising inflation, has added a layer of complexity to the market outlook.
The next several weeks will be filled with potential volatility as we look ahead. The Federal Reserve’s meeting in December will be crucial in setting the direction for inflation and monetary policy moving forward. Traders will need to stay alert, watching for any changes in fiscal policy or signs that the Fed might adjust its rate-cut strategy.
In the forex market, we’ve already seen movement.
The USD Index (USDX) is showing a strong bullish trend, holding steady at 107.00, but if the anticipated rate cuts come through, it could push even higher.
EURUSD has continued to slide as the dollar strengthens, while GBPUSD is holding steady but could face support near 1.2550.
USDJPY remains a key focus, especially around resistance levels of 157.40 or 158.30.
In the world of crypto, Bitcoin recently had a sharp upward move, peaking at around the 88,000 mark. Traders might need to curb their optimism as further consolidation indicates an upcoming pullback.
If this bearish movement continues, key support levels could come into focus, and traders may look for a potential correction or retracement
For traders, it’s clear that the next few weeks will be critical. With inflation, fiscal policies, and Fed decisions all in play, the market is bound to remain active and unpredictable.
Whether you’re trading forex, commodities, or equities, positioning ahead of these events could offer opportunities – or risks – depending on how these factors unfold.
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