At the end of last year, financial markets anticipated six rate cuts by the Federal Reserve, totaling 1.5 percentage points. Recent days have brought rumors that there might not be any rate cuts at all. Over the previous three years, similar or even less drastic changes in expectations have triggered significant fluctuations in financial markets, leading to a rise in the dollar and sell-offs in the stock market.
Alex Kuptsikevich, a senior analyst at FxPro, noted: However, since the beginning of this year, the market has handled the shift from one extreme expectation to another in a surprisingly calm manner, with the stock market impressively up by 9% and the dollar index rising a little over 2.5%. Does this indicate an inherent weakness in the dollar? More likely, it's a signal that market participants see the current expectations as fragile.
Last Friday's employment market report failed to alter or clarify this trend. Now, it's the inflation report, which in recent months, the volatility of inflation has overshadowed reactions to non-farm payroll data.
Analysts on average expect that March housing prices will rise by 0.3% month-over-month, with the annual increase accelerating from 3.2% to 3.4%. However, since October last year, these figures have either met or exceeded expectations.
The current report will determine the fate of the Federal Reserve's interest rate decision in June. The probability of a rate cut on June 12 is now at 57%, down from a local peak of 76% on March 22 and 100% at the end of February.
The Fed often states that data will decide the committee's next move. This reluctance to make predictions is creating a palpable tension in financial markets, though so far, it has not triggered the kind of volatility that some might worry about.
Exceeding expectations might ultimately trigger an upward trend in the dollar, rather than the current strong, but narrowly positive fluctuation. Meanwhile, this could be a substantial factor enough to cause a 5-10% correction in the US stock indices.
