In recent weeks we have seen some positive data from the US, showing a rebond in the econoy this year, while also seeing inflationary pressures, which is not exactly good, but it’s bullish for the USD. On Friday we saw an increase in core PCE price index and traders have now moved in line with what the FED forecasted in the December. Although, now we’re back to the question of how long the FED will keep tightening and how long will they plateau after that?

US Core PCE, Personal Income and Personal Consumption

• January PCE core inflation 4.7% vs 4.3% expected
• YoY core inflation 4.4% prior revised up to 4.6%
• MoM core inflation 0.3% prior revised to 0.4%
• Core PCE MoM 0.6% versus 0.4% expected. Last month 0.4% revised up from 0.3%
• Core PCE YoY 4.7% versus 4.3%.
• Personal income 0.6% versus 1.0% expected. Last month 0.3% revised up from 0.2%
• Personal consumption real 1.1% versus -0.3% last month
• Personal consumption adjusted 1.8% versus 1.3% expected. Last month -0.1% versus -0.2% previously reported

Hotter inflation in the US sent stocks to the downside. In the forex, the USD has moved to new highs against all the major currencies.

• Dow down -330 points.
• NASDAQ down -169 points.
• US yields are moving higher with the two-year up 6.3 basis points to 4.755%.
• The 10 year yield is up 4.7 basis points to 3.97%

The Dot Plot from December 2022

The FED Dot Plot on March 22 will be very interesting and there are quite a few scenarios here. They might pick up the pace to 50 bps hikes again, or keep the same pace at 25 bps and hike for longer, or keep the dot plot unchanged but hold the rates high for longer. On the other hand, markets have pushed a recession for 2024, so if the economicdata starts to weaken in Q3 then the FED might start to reverse the policy and cut rates, although for that scenario we will have to wait for more evidenc down the road.

Following the dot plot and holding rates high for longer is still the most likely scenario but nothing is certain. This uncertainty is bad for risk sentiment and stocks, which leaves the USD in a bullish situation. As for the upcoming meeting, the odds of 50 bps are at 24% with the remainder at 25 bps.