The economic data released on Thursday (April 26) paints a worrying picture of the US economy. Although the market has mostly avoided the panic, numbers suggest that the soft landing people are hoping for may be increasingly unlikely.
The gross domestic product (GDP) growth rate was only 1.6%, which was lower than expected. As a key indicator of the Federal Reserve, the core personal consumption price index (PCE) inflation unexpectedly reached 3.7%, the highest level since November last year. The combination of slowing growth and continued inflation raised the risk of stagflation, a scenario the Federal Reserve is desperately trying to avoid.
Further data releases over the next few weeks will be critical. If current trends continue, it may become more difficult for the Federal Reserve to target a soft landing. Policymakers will have to strike a delicate balance between containing inflation and not triggering a recession.
Stock markets and currency pairs awaiting the Federal Reserve's next move
On Thursday, it was difficult for both the money market and the stock market to find their way. EUR/USD initially fell but returned to a positive value at the end of the day. The S&P 500 and Nasdaq indices also showed similar behavior, recovering losses, indicating that the worst has yet to happen.
As key data such as the US labor market and the Federal Reserve meeting in particular arrive, the market is likely to remain cautious. Considering that interest rates will not change, everyone will be watching subsequent statements and Federal Reserve Chairman Powell's press conference to get clues about the future direction of the Federal Reserve.
Shifting or suspending?
According to reports, Treasury Secretary Yellen is optimistic that the US economy can handle inflation without causing major unemployment. This raises questions about the possible path the Federal Reserve may take.
The market-friendly situation is that once inflation reaches the target, the Federal Reserve will cut interest rates. This would be beneficial to financial markets. However, the Federal Reserve also needs to focus on economic growth to prevent a recession. If they change their position and adopt dovish policies to deal with the recession, inflation is likely to surge again.
The dollar retreated
The US dollar has been adjusting since mid-April. The initial target for the bears is the 105-point area, which is also in line with a major correction point in the previous uptrend.
Below this level is a key support level defined by an ascending trend line. A break through this support could signal the collapse of a local uptrend. If this happens, sellers may target the next demand zone around 104 points.