Markets act as if the Fed is still Dovish

Dollar

The US dollar has retreated to the lower levels it has visited multiple times since the end of January. The decline at the end of last week was driven by reports that US 'retaliatory' tariffs have been postponed until April, allowing time for negotiations and potential easing of terms. This development proved more significant for the dollar than the Federal Reserve's further hawkish stance and the unexpected rise in inflation.

Data released mid-week indicated that consumer inflation accelerated to 3.0% year-over-year, marking a six-month high and a notable increase from September's low of 2.4%. Core inflation remained stable at 3.3% over the past eight months. Additionally, the producer price index, a leading indicator of inflation, rose to 3.5% year-over-year, the highest rate since early 2023.

An inflation rate above the target compels the Federal Reserve to adopt a restrictive approach, maintaining the key interest rate above inflation to suppress it. This strategy may present a bullish scenario as other major central banks signal their intent to ease policy.

Indices

US stock indices continued to stabilize and showed strength toward the end of the week. Notably, buyers reacted positively to the news.

At the beginning of the week, Federal Reserve Chair Powell assured lawmakers that there was no urgency to cut the interest rate. Considering the pause for a cut in January, the markets price a 95% probability that there would be no rate cut in March either. Consumer inflation and producer price indicators, which were significantly higher than expected, reinforced this sentiment.

Interestingly, this did not trigger a sell-off in equities. Instead, the initial decline was quickly reversed, and on Thursday, the Nasdaq100 approached the 22,000 level. In January, this index had received support on dips to the 50-day moving average.

A similar trend was observed with the S&P500, which saw active buying below the 50-day average since mid-January. By the end of the week, there were attempts to regain ground.