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Dollar Tumbles but S&P 500 Unable to Liftoff After Fed Reiterates Support

Dollar Tumbles but S&P 500 Unable to Liftoff After Fed Reiterates Support

John Kicklighter, Chief Strategist

S&P 500, Dollar, USDCAD, USDJPY and Earnings Talking Points:

  • The Federal Reserve not only held rates and stimulus unchanged, Chairman Powell looked to dispel any fears that any normalization is ahead
  • Despite the relief for risk assets to the Fed keeping its support in place – and subsequent boost of earnings and Biden talking stimulus – the S&P 500 still wouldn’t advance
  • The Dollar wouldn’t hold back the fundamental tide with USDCAD and USDJPY most impressive – will US 1Q GDP help stabilize the Greenback?

The Fed Makes Clear It Will Not Be Taking the Punch Bowl Away

The event risk I – and seemingly the market at-large – have been waiting for has passed in favor of the risk takers. At the conclusion of their two-day meeting Wednesday afternoon in Washington DC, the Federal Reserve decided to make clear to the market that it would not be looking to ease up on its extraordinary expansive monetary policy anytime in the near future. Ultimately, no change in rates and the $120 billion per month purchase of Treasury and Agency debt comes as absolutely no surprise. However, the central banks most heavily used tool of the past decade, forward guidance, would not be utilized in an effort to acclimatize the market to an inevitable future where normalizing will happen. While the Dollar responded as expected in this case, one well-positioned benefactor S&P 500 found no traction. Nor would it be roused to any subsequent follow through typical motivators of strong US earnings and the government’s waxing over fresh stimulus.

Table of FOMC Monetary Policy Scenarios

Dollar Tumbles but S&P 500 Unable to Liftoff After Fed Reiterates Support

Chart Created by John Kicklighter

When it comes to monetary policy, there is certainly a backdrop for which the cautious would say support is fully justified to return economic activity to its strong and self-sustained trajectory before the pandemic. To that I would say that there hasn’t been a material unwind of the extreme policies since they were first adopted after the 2008 Great Financial Crisis (the brief taper and a few Fed hikes notwithstanding). In the slow acclimation and transition period from record stimulus to measured normalizing from 2013 to 2015, one of the most disruptive aspects of the progression was the initial realization that the Fed could move in either direction, circumstances warranted. With a further 100 percent advance in the S&P 500 and 75 percent increase in the Fed balance sheet since the first rate hike back in December 2015, there is even more risk of a panic reaction to an eventual first shift. On that point, it is worth noting that Chairman Powell did say that equity markets – which he remarked some view as a barometer for financial stability – was showing some “froth”. If the central bank is able to normalize at its leisure, this may not prove a problem. However, if the inflation pressures which have been building up prove not to be ‘transitory’ as they expect; it could prove the perfect pin prick on an incredible asset bubble.

US 5-Year Breakeven Inflation Rates and Producer Inflation Commodities (Monthly)

Dollar Tumbles but S&P 500 Unable to Liftoff After Fed Reiterates Support

Chart Created on St. Louis Federal Reserve Economic Database

The S&P 500 Still Can’t Find Lift With All the Favorable Winds Combining

With the Fed removing itself as a hurdle to the continued charge in risk appetite, what is remarkable heading into Thursday trade is that improved outlook has not in turn authorized a benchmark like the S&P 500 to capitalize on its already-record run. Though the Dow, Nasdaq 100 and Russell 2000 all pulled back; the retreat was not exactly a signal of a true bearish reversal. In fact, the SPX put in for yet another exceptionally restrained day with a range of less than 20 points. The three-day ATR (as a percentage of spot) remains the lowest since Christmas Eve 2019 and is really on comparable to holidays and the extreme quiet of through 2017. The structural and seasonal liquidity drain seem to maintain an anchor, but how long will a struggle to progress start to register as a detriment in a market where investors depend on capital gains?

Chart of S&P 500 with 20 and 100-Day Mov Avg and 3-Day ATR (Daily)

Dollar Tumbles but S&P 500 Unable to Liftoff After Fed Reiterates Support

Chart Created on Tradingview Platform

In reality, I am not that surprised that the markets were not reset to the unquestioning rally after the central bank event passed. Yet, the lack of enthusiasm despite additional support from earnings and the early insight into US President Joe Biden’s stimulus references in his first address to Congress is unexpected. Following Google’s enormous beat after the close Tuesday, the run after Wednesday’s close was on tap to refresh confidence. Facebook ($3.30 vs $2.49 expected EPS), Ford ($0.89 vs $0.16) and Apple ($1.40 vs $0.83) all soundly beat – with AAPL increasing its dividend 7 percent and increasing its existing share repurchase program by $90 billion. If that doesn’t inspire a strong start to Thursday’s New York session – and as long as US 1Q GDP doesn’t shock to the downside – it will further raise scrutiny.

Calendar of Key Macro Economic Events

Dollar Tumbles but S&P 500 Unable to Liftoff After Fed Reiterates Support

Created by John Kicklighter

The Dollar Wouldn’t Dodge the Fundamental Hit, But There Are Better Positioning Pairs

In contrast to the US equity market’s inability to capitalize on the dovish monetary policy shift, the US Dollar groaned under the weight of an extended yield suppression as would be expected under rudimentary scenario analysis. The DXY Dollar Index extended its month-long slide and is presently registering a -2.8 percent drop through April, the second worst month for the currency since January 2018. It is worth nothing that despite the Greenback’s response, the US 10-year Treasury yield did hold up fairly well while implied rates through Fed Fund futures still disputes the timing of the first hike relative to the central bank’s own view. Will these measure continue to diverge or will one side relent to the other?

Chart of US 10-Year Yield Overlaid with DXY Dollar and Implied Fed Rates with Correl (Daily)

Dollar Tumbles but S&P 500 Unable to Liftoff After Fed Reiterates Support

Chart Created on Tradingview Platform

Among the Dollar-based crosses, many are naturally interested in the most liquid pairings like EURUSD and GBPUSD. While they both offer their own technical levels – EURUSD is attempting to retake the midpoint of its historical range at 1.2125 and GBPUSD has advanced four straight days – there is little impetus for pace. On the other hand, the often overlooked USDCAD put in for an unusually hearty -0.7 percent drop to project a tumble to fresh three-year lows. This is proving to be a remarkably consistent channel.

Chart of USDCAD with 20 and 100-Day Moving Average (Daily)

Dollar Tumbles but S&P 500 Unable to Liftoff After Fed Reiterates Support

Chart Created on Tradingview Platform

Another USD pair to watch closely moving forward is USDJPY. This is one of my favorite barometers for the Greenback itself because it is a crossroad for a few critical themes for which the benchmark represents. This past session’s excitement tapped into two such matters: risk appetite that would urge carry trade (Yen crosses) higher and the direct swoon that comes with a lowered yield forecast in the US. Which of these two themes carries greater pull in the market? Considering USDJPY reversed from 109 and looked to return to its April slide, it seems the yield factor exacted a greater toll.

Chart of USDJPY with 20 and 100-Day Moving Average (Daily)

Dollar Tumbles but S&P 500 Unable to Liftoff After Fed Reiterates Support

Chart Created on Tradingview Platform

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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