Investors bet on more aggressive rate hikes, Fed report in focus

With red-hot US inflation data and hawkish comments from a Federal Reserve official, European markets are expected to open lower on Friday as bets on a more aggressive increase in US interest rates fuelled, and US Treasury yields jumped ahead of the Fed monetary policy report later today.

On Friday, the greenback also jumped above the 50-day EMA, turning broadly firmer after an unexpectedly significant jump in US consumer prices as pressure increased on the Federal Reserve to take a stronger stand against inflation. 

Hot inflation at 37-year record

Consumer prices increased 0.6% last month after a similar increase in December. The CPI surged 7.5% in the 12 months through January, the biggest year-over-year increase since February 1982. It was the fourth consecutive month in which annual increases exceeded 6%, following a 7.0% rise in December.

Central banks may join Fed later this year

It should be noted that the Fed is not the only central bank seeking tightening policies. In particular, the European Central Bank's hawkish pivot last week can cap dollar gains by eliminating a headwind for the euro. Reserve bank of Australia also suggests interest rates could rise later this year. However, the bank does not wish to move too early and is waiting for two more quarterly inflation reports before taking any action. 

Events of the day

Investors are waiting for the Federal Reserve's monetary policy report to be released later on Friday. While speculation about the Fed's reaction to higher-than-expected inflation continues, this report will provide important clues about their decision.

Among economists, Goldman Sachs now forecasts the Federal Reserve will raise interest rates seven times to contain surging inflation. 

Considering the market shift and St. Louis Federal Reserve President James Bullard's support for a full percentage point hike in interest rates over the next four months, an internal debate within the Fed over how fast and how high to raise rates is likely to intensify before the March 15-16 rate decision. More aggressive rate hikes can support the dollar in the meantime. Still, as soon as other CBs join the tightening party, their currencies may modify fluctuations and cap prior moves. While a stronger dollar may weigh on commodities prices until supply-chain problems are fully resolved.