USD, S&P 500 FORECAST:
- U.S. dollar slides on Monday ahead of Wednesday’s FOMC decision
- Meanwhile, the S&P 500 treks upwards following Friday’s selloff, but its moves lack strong conviction
- The Fed’s monetary policy outlook will be key for financial markets in the near term
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The U.S. dollar (DXY index) was subdued on Monday, but managed to stay near its multi-month peak ahead of a high-impact event: the FOMC announcement. Meanwhile, the S&P 500 experienced a modest uptick, but its moves lacked conviction, with traders refraining from making large directional bets prior to the U.S. central bank’s verdict, which could be key for financial assets.
The Federal Reverse will release its September monetary policy decision on Wednesday. While no interest rate adjustments are anticipated, market participants will be closely scrutinizing the “Summary of Economic Projections,” particularly the dot plots, for valuable insights into the ongoing tightening campaign.
Currency and equity traders should pay attention to two important aspects: the final destination for the Fed funds rate and the magnitude of monetary accommodation envisioned for 2024.
In their June projections, the Fed penciled in a midpoint terminal rate of 5.625%, a level that would imply an additional quarter-point increase from the current stance. Investors harbor doubts about the likelihood of another hike in 2023, so any indications reaffirming the commitment to further tightening could spark a hawkish repricing of interest rate expectations, sending the U.S. dollar higher and the S&P 500 lower.
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Recognizing the forward-looking nature of markets, it’s essential to keep a watchful eye on the Fed’s longer-term projections. With the U.S. economy demonstrating impressive resilience and inflation showing extreme stickiness, traders should carefully monitor whether policymakers adhere to their previous quarterly forecasts, which anticipated 100 basis points of cumulative easing in 2024.
The FOMC has been burned several times by false dawns of disinflation. As a result, it will be cautious not to send any signals that could be construed as overly dovish, as such messages could jeopardize its efforts to restore price stability, especially now that oil is approaching $100 per barrel.
In this context, it would not be surprising to see fewer rate cuts planned for 2024 than before. This scenario could bolster Treasury yields across the curve, especially short-dated ones, creating a constructive backdrop for the greenback and a hostile environment for risk assets such as equities. This means that the day of reckoning could be just around the corner for both the S&P 500 and the Nasdaq 100.
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US DOLLAR (DXY) TECHNICAL ANALYSIS
Earlier in September, the U.S. dollar staged a strong rally, breaching trendline resistance and setting its highest level in six months.
With bullish momentum on its side, the DXY index may be able to stay on an upward trajectory, especially if it holds above technical support at 104.50. In such a scenario, we could see a move towards 105.38, a key ceiling created by the 38.2% Fibonacci retracement of the September 2022/July 2023 decline. On further strength, a possible retest of the March highs seems likely.
Conversely, if sellers regain control and trigger a significant pullback, initial support is located at 104.50, followed by 103.80. In the event of further weakness, sellers could become emboldened to launch an assault on 103.50.
US DOLLAR (DXY) TECHNICAL CHART
U.S. dollar Index (DXY) Chart Prepared Using TradingView
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S&P 500 TECHNICAL ANALYSIS
The S&P 500 sold off last Friday after failing to break through a key ceiling at 4,560, with sellers driving the equity benchmark all the way down to the psychological 4,500 level, where prices appear to have found some sort of support at the start of the new week.
Looking ahead, if the index manages to hold above 4,500, buying impetus could pick up pace, setting the stage for a retest of trendline resistance near 4,560. On further strength, the bulls could muster the determination to initiate an all-out attack on the 2023 highs, just a tad below the 4,640 mark.
In the event of a setback, initial support is located at 4,500, but further losses may be in store on a push below this threshold, with the next downside area of interest situated 4,440, and 4,415 thereafter.
S&P 500 TECHNICAL CHART
S&P 500 Futures Chart Prepared Using TradingView
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