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Daily Market Update: Thursday, February 2, 2023

The Federal Reserve’s announcement of a 25 basis point increase in the target interest rate overnight sent ripples through the stock market and the US dollar. While the American economy is seeing moderate growth and strong job increases, policymakers are still wary of inflation threats. In this article, we will delve into the market reaction to the Federal Reserve’s statement and its potential impact on the economy.

The Fed’s Dovish Remarks
Federal Reserve Chairman Jerome Powell’s remarks were seen as dovish by the market as he acknowledged that inflation was beginning to drop and that the disinflationary process was in its early stages. This led to a bumpy start for US stocks on Wall Street, but they soon rose as Powell’s comments instilled confidence in investors. The Dow Jones Industrial Average rose by 6.92 points, or 0.02%, to 34,092.96, the S&P 500 gained 42.61 points, or 1.05%, to 4,119.21, and the Nasdaq Composite added 231.77 points, or 2%, to 11,816.32. The S&P 500 reached its highest close since August 25.

The US Manufacturing Industry Contracts
Prior to the policy announcement, economic data showed a mixed picture with US manufacturing activity contracting for a third consecutive month. The ISM Manufacturing Purchasing Managers Index (PMI) fell to 47.4 from 48.4 last month, indicating contraction. Market participants now see a weaker US labor market as a crucial factor in reducing stubbornly high inflation.

The Eurozone Inflation and the Central Bank’s Interest Rates
Data released yesterday showed that core inflation in the Eurozone increased to 7% from 6.9% in January, while headline inflation softened to 8.5%. This puts pressure on the European Central Bank (ECB) and the Bank of England to increase interest rates. The ECB and the Bank of England will decide on interest rates today.

The Dollar’s Soft Start to February
The US dollar began February on a soft note, following its downward trend from the previous four months. Powell’s remarks caused the dollar to lose more ground and drop to its lowest point since late April. The EUR/USD rose 1.11% to 1.0983, the Dollar Index dropped by 0.901%, GBP/USD was last trading at 1.2371, up 0.41% on the day, and USD/JPY fell 0.83% to 129.02.

The Commodities Market Reacts
In the commodities market, crude oil prices fell more than $3 per barrel throughout the session as OPEC and its partners continued to stick to their output policy. Meanwhile, US government data revealed significant gains in stocks of crude oil, gasoline, and distillate. West Texas Intermediate (WTI) US crude futures declined $2.46, or 3.1%, while Brent crude futures dropped $2.62, or 3.1%, to close at $82.84 per barrel.

Gold Prices Surge
Gold prices rose during Powell’s press conference, with the April COMEX gold futures last trading at $1,966.80, up $21.50 on the day.

Bitcoin and Ethereum React to the Fed’s Statement
Bitcoin’s value increased by $700 and surpassed $23,600 as Federal Reserve Chair Jerome Powell indicated that the Fed is noticing a decline in inflation. Following the Fed’s remarks, Bitcoin reached a peak of $23,815.70 and its value increased by 2.74% for the day. It is currently trading at $23,770. Ethereum’s token, Ether, rose by 3.66% to a value of $1,643.80.

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