USD Down, Risk Assets Higher on Lower FED Inflation Expectations

The USD is feeling weak again today after the FED revised inflation expectations considerably lower for 2023

Skerdian Meta•Monday, March 13, 2023•2 min read

Powell's comments will be more important than the FED rate cut itself

The USD started to reverse higher in February after some decent data from the US, showing a rebound in the US economy. This meant that the FED would push further with rate hikes, which Jerome Powell confirmed last Tuesday and the USD surged after those comments.

But, Powell left the policy to the economic data which turned risk sentiment positive in the second half of the week, while the USD retreated lower as we have seen some weaker figures in certain sectors in the last two weeks. Today the economic data has been light, but the US inflation expectations for this year released a while ago showed a sizeable slowdown, which is negative for the USD, with the idea that the FED would pause rate hikes and probably reverse lower.

FED 2023 Inflation Expectations Fall to the Lowest Since May 2021

One-year inflation expectations 4.2% vs 5.5% prior
Three-year inflation 2.7% vs 2.7% prior
Five-year inflation 2.6% vs 2.5% prior
Expected home price appreciation 1.4% vs 1.1% prior
Household views on financial situation improved in February

There’s some good news on short-term inflation expectations here. The Fed can look at some of this and say they can slow down and see how things unfold. The numbers above show a decline of 0.8% in expectations, to 4.2% for 2023, while there was no change at 2.7% for the three-year-ahead horizon, and an increase of 0.1 percentage point to 2.6% for the five-year-ahead horizon. The survey also found that the level of disagreement among respondents decreased at all three horizons.

The FED’s highly anticipated interest rate decision scheduled for later this month is drawing near, but recent events have shaken up expectations. Over the weekend, the FED announced an emergency lending program to assist banks facing losses due to interest rate changes. The situation has highlighted the risks associated with higher interest rates, making the central bank more cautious as it moves forward. As a result, Gold and other safe havens have been pushing higher and we have been booking profit on Gold longs and USD shorts.

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Skerdian Meta

Lead Analyst

Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.