Wall Street’s Fear Gauge Plummets as Markets Rally

March 22, 2023

Wall Street’s fear gauge, the VIX, saw its largest two-day plunge since May as the recent financial turmoil eased, resulting in a rebound of stocks. This surge in banks and assurances from authorities has restored a sense of order to the market for the time being. As the Federal Reserve decision approaches, traders are anticipating another 25 basis-point hikes, indicating officials’ commitment to battling inflation and maintaining financial stability. The uncertainty over the Fed’s decision is currently among the highest since the pandemic sparked emergency rate cuts in 2020. Policymakers are also expected to provide updated rate projections for the first time since December, which will offer guidance on whether additional hikes can be expected this year.

In the benchmark, the S&P 500 topped 4,000 and extended its advance above the key 200-day moving average. The Cboe Volatility Index, which briefly exceeded 30 last week for the first time since October, plummeted to around 21. This led to every stock in a measure of US financial heavyweights climbing, with First Republic Bank surging almost 30% due to optimism over a new plan under discussion to aid the regional lender. Furthermore, seven out of eleven sectors stayed in positive territory, indicating an improvement in market risk sentiment.

For investors, the recent rally in the market and decline in the VIX could signal a return to a more stable investing environment. However, it is important to note that market conditions can change rapidly, and investors should remain vigilant in monitoring their portfolios. As the Fed’s decision approaches, investors should be prepared for potential market volatility. Additionally, it may be wise to consider diversifying portfolios to mitigate potential risks.

Main Pairs Movement

On Tuesday, the dollar pared earlier losses as traders considered the possibility that banking stress could prevent the Federal Reserve and Bank of England from hiking interest rates much further or at all later in the week. The DXY index edged lower with 0.07% daily losses, experiencing some selling during the European trading session before climbing to the 103.2 level in the middle of the American trading hour.

Meanwhile, the GBPUSD dropped with 0.5% losses on a daily basis, marking the first negative day in consecutive four days. Mixed concerns over the Brexit deal’s acceptance and hawkish Fed bets teased sellers, leading to a drop to a daily low of 1.2179 level in early US trading hours, before recovering to the 1.2220 level. In contrast, the EURUSD surged to a level above 1.0780 and closed at 1.077 with a 0.44% daily gain on Tuesday.

However, gold slumped with 1.96% losses on a daily basis, as investors remained anxious ahead of the key Federal Reserve (Fed) Interest Rate Decision. The market mood is fragile, and any incident could trigger wild market reactions. The XAUUSD faced strong corrective pullback pressure for the day, falling to a daily low of the $1935 mark during the middle of the American trading hour.

Investors are keeping a close eye on the Fed’s decision, as it could have a significant impact on market conditions. As always, it is essential for investors to remain vigilant and closely monitor their portfolios to mitigate potential risks.

Technical Analysis

EURUSD (4-Hour Chart)

On Tuesday, the EUR/USD pair rose higher, with buyers entering the market ahead of the European session. The pair continued its recent rally, reaching the 1.0780 area, driven by a persistent hawkish narrative from some ECB speakers. The EUR/USD pair is currently trading at 1.0765, posting a 0.45% gain on a daily basis. The positive sentiment in the financial markets and the weaker US dollar are also contributing to the pair’s rise.

Traders are anticipating that the Fed may cut rates due to the failure of two banks in the United States and another on the brink of default, which has shifted global central banks’ interest rate increase expectations. In the Eurozone, measures to support the global financial system and news that JPMorgan Chase is assisting First Republic Bank have helped the market mood recover, providing support to the shared currency.

From a technical standpoint, the RSI indicator currently stands at 65, indicating that the chances favor the bears as the RSI begins to turn south below 70. The price failed to extend its upside traction and retreated from the upper band of the Bollinger Bands, suggesting that some downside movement may be expected. Overall, the market is expected to be bearish as long as the 1.0790 resistance line holds. However, a break above this resistance could open up the possibility of additional gains.

Resistance: 1.0790, 1.0830

Support: 1.0730, 1.0688

XAUUSD (4-Hour Chart)

The XAUUSD has stopped its upward trend and has started heading south this week due to improvements in risk appetite and rising US Treasury bond yields. At the time of writing, the gold price is trading at a day low of $1,941 and continues to trend downwards. Traders’ fears have calmed in the last 48 hours after the UBS takeover of Credit Suisse, and US banks have continued to try to stabilize First Republic Bank. The Federal Reserve is expected to begin its March monetary policy meeting, with traders anticipating a 25 bps rate hike as Powell and Co. continue their efforts to curb stubbornly high inflation. Another reason for gold’s fall is the rising US Treasury bond yields, with the US 10-year Treasury bond yield up nine bps at 3.58%. The 10-year Treasury Inflation-Protected Securities, a proxy for US Real Yields, stands at 1.351% after tumbling as low as 1.142% on March 16.

From a technical standpoint, the XAUUSD’s daily chart indicates a bullish bias in the yellow metal. However, the price action in the last three days could form an evening star candlestick chart pattern, indicating that gold may drop in the near term. The first support would be the March 15 daily high turned support at $1933, followed by the $1914 barrier. Once cleared, the 20-day Exponential Moving Average (EMA) at $1892 is next. The RSI sits at 62.

Resistance: 1958, 1996

Support: 1933, 1914

Economic Data