Having confidently broken through the key resistance levels last week, futures for major US stock indices are declining today. In particular, the US broad market index S&P 500 (reflected as CFD #SPX in the trading terminal) broke through the long-term resistance level of 4185.00 and rose last Friday to a 14-week high and a mark of 4277.00.
The strengthening of the craving of market participants to buy risky but also highly profitable stock market assets, in particular, was facilitated by the weakening of the dollar.
A series of negative macro data from the US in the previous weeks reduced the likelihood that the Fed leaders would continue the cycle of over-tight monetary policy.
Even though the Fed has already raised interest rates four times this year, market participants were waiting for the continuation of monetary tightening at the same pace.
At the beginning of the year, many economists expected the Fed to raise interest rates seven times this year, by 0.25% each time. However, their opinion changed after US consumer prices showed the biggest jump since 1982 in January, and then inflationary pressures began to build. And in June, annual consumer inflation reached its peak in the last 40 years, rising to 9.1%. Following this, the dollar index (DXY) rose in mid-July to a maximum since October 2002 and a mark of 109.14.
Such a sharp jump in inflation led to increased expectations of a more aggressive tightening of the Fed's monetary policy.
Usually, an increase in the interest rate leads to a strengthening of the national currency and a decrease in stock indices.
However, the current situation in the American and world economies cannot be called normal or normal against the backdrop of a sharp increase in energy prices, inflation, and geopolitical tensions in the world.
By raising the interest rate, the Fed is in a difficult situation—to reduce inflation without harming the labor market and the economy. So whenever the Fed has raised interest rates this year, its leaders have said that the US economy and labor market are in good shape and will withstand further rate hikes.
However, the picture is not entirely clear. On the one hand, inflation does look like it's starting to slow down. This is evidenced by the CPI indices published last week. According to data provided by the Bureau of Labor Statistics, consumer inflation in the US slowed down in July: CPI came out with a value of 8.5% (on an annualized basis), which was below the forecast of 8.7% and the previous value of 9.1%. Core CPI (excluding food and energy prices) remained unchanged at 5.9%, which was also below the forecast growth to 6.1%. On a monthly basis, core inflation rose 0.3% after rising 0.7% in June, also indicating a slowdown in its growth rate.
Weaker inflation data significantly dampened expectations for a larger Fed rate hike, putting pressure on the dollar. Moreover, the slowdown in inflation is accompanied by a slowdown in the US economy. According to preliminary estimates, in the 2nd quarter, US GDP fell again (by -0.9%) following a fall in the 1st quarter (by -1.6%).
Now the probability of a 75 bps Fed rate hike fell to 35% in September from 80% (before the publication of the CPI), according to the CME Group, which also affected the yield of US Treasury bonds, causing it to decline sharply.
Against this background, as we noted above, US stock indices continued to grow, having reached local highs over the previous few weeks by now.
Nevertheless, futures for major US stock indices are falling today, while the dollar index is growing. As of this writing, DXY futures are trading near 106.08, 57 pips above Friday's close.
Now, after the breakdown of the local resistance level of 106.00, the breakdown of the next "round" resistance level of 107.00 will be a confirming signal for the resumption of growth in DXY and the strengthening of the dollar.
Moreover, market participants again paid attention to the dollar as a defensive asset due to the escalation of tension around Taiwan: last weekend, following Nancy Pelosi, a delegation of American legislators arrived on the island, fueling tensions between the US and China.
Today there are no important publications in the economic calendar. Due to the lack of new drivers, including news ones, further strengthening of the dollar and a decrease in stock indices are likely, but so far, in the form of a correction after a strong growth.
The S&P 500 is back in the bull market after breaking through the 4185.00 resistance level last week, and for now, it is necessary to focus on the possibility of entering long positions.
