Fed’s Monetary Policy Outlook Weighs on S&P 500, Nasdaq Shines in Tech Rally

June 29, 2023

The S&P 500 saw minimal movement on Wednesday as investors closely analyzed Federal Reserve Chair Jerome Powell’s remarks regarding future monetary policy. Powell emphasized the likelihood of more restrictive measures to combat inflation, including potential consecutive interest rate hikes.

His comments, made at the ECB Forum on Central Banking, alongside other global central bankers, had a mixed impact on the markets.

While the Dow Jones Industrial Average declined by 0.22%, and the S&P 500 dipped slightly by 0.04%, the Nasdaq Composite bucked the trend and closed higher for a second consecutive day. This was driven by the positive performance of tech giants such as Alphabet and Tesla, which saw gains of over 1% and 2% respectively, while Netflix shares surged by more than 3%.

These results contributed to the Nasdaq Composite’s impressive year-to-date increase of nearly 30%, leading to its strongest first half in four decades.

The divergent outcomes on Wall Street reflected a tug-of-war between market optimism and concerns over prolonged low-interest rates.

Despite the potential headwinds caused by discussions of future monetary policy, investors remained optimistic, particularly in the tech sector, riding the wave of excitement surrounding artificial intelligence, and propelling the market to significant gains in the first half of the year.

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Data by Bloomberg

On Wednesday, the overall market saw a slight decline of 0.04%. The energy sector performed well, experiencing a gain of 1.02%, followed by communication services with a rise of 0.80%. Consumer discretionary stocks also showed a modest increase of 0.25%, while real estate saw a smaller gain of 0.21%.

However, there were some sectors that experienced declines. The utilities sector had the largest decrease, dropping by 1.48%. Materials and consumer staples also saw significant declines of 0.68% and 0.59% respectively. The healthcare sector experienced a decline of 0.35%, while information technology and industrials both had small decreases of 0.03% and 0.04% respectively. Financials also declined, albeit to a lesser extent, with a decrease of 0.18%.

Major Pair Movement

On Wednesday, the dollar index strengthened by 0.4% as weaker economic indicators in the eurozone and other regions contrasted with generally positive U.S. data. The eurozone displayed signs of economic weakness, and concerns were raised about the effectiveness of government stimulus measures in boosting the economy and commodity currencies.

In contrast, U.S. data released on Tuesday showed positive results. The market briefly responded to hawkish remarks made at the European Central Bank’s conference, but overall, the focus remained on data dependence. The upcoming days will feature inflation data from both the eurozone and the U.S., as well as jobless claims.

Sterling experienced a decline of 0.8% amid the Bank of England’s dilemma in managing inflation. The USD/JPY pair, despite some fluctuations, maintained its rally since the June meetings of the Federal Reserve and the Bank of Japan, with uncertainty injected by the Japanese side.

Picks of the Day Analysis

EUR/USD (4 Hours)

EUR/USD Rebounds as ECB Reaffirms Rate Hike Expectations, US Dollar Supported by Fed’s Hawkish Stance

The EUR/USD pair experienced a drop below 1.0900 but rebounded during the American session, aided by the European Central Bank’s (ECB) confirmation of upcoming rate hikes. The Euro received support from ECB President Lagarde’s comments, while the US Dollar benefited from rising expectations of a rate hike by the Federal Reserve (Fed) in July.

Inflation data from the Eurozone started to emerge, with Italy’s Harmonised Consumer Price Index slowing to 6.7% in June. Despite declining headline inflation, ECB members remain focused on persistent inflation concerns.

Better-than-expected US economic data further strengthened expectations of a Fed rate hike, boosting the US Dollar. More economic data is expected, including jobless claims, GDP estimates, and the Core Personal Consumption Expenditure report. While the US Dollar gains momentum against certain currencies, the Euro continues to hold its strength in the market.

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Chart EURUSD by TradingView

According to technical analysis, the EUR/USD pair moved lower on Wednesday and reached below the middle band of the Bollinger Bands. Currently, the price is moving just below the middle band of the Bollinger Bands which shows that there’s a possibility that the price will continue to move lower. The Relative Strength Index (RSI) is currently at 44, suggesting that the EUR/USD is still in a neutral position but slightly bearish.

Resistance: 1.0922, 1.0965

Support: 1.0890, 1.0842

XAU/USD (4 Hours)

XAU/USD Under Selling Pressure as US Data and Central Bankers’ Comments Drive Risk-Off Sentiment

XAU/USD faced selling pressure for the third consecutive day, reaching a low of $1,902.80 during the American session. The US Dollar gained strength due to disappointing US data and cautious remarks from central bankers, leading to a risk-off sentiment in financial markets.

The release of the preliminary estimate of the May Goods Trade Balance, showing a deficit of $91.1 billion, and lower-than-expected Wholesale Inventories in May contributed to the shift in sentiment. During the ECB Forum on Central Banking, Federal Reserve Chairman Jerome Powell stated that inflation needs more time to align with the Fed’s target, leaving room for further monetary tightening.

Bank of England’s Andrew Bailey mentioned the UK economy’s resilience despite persistent inflation, while ECB President Christine Lagarde hinted at a potential rate hike in July. These developments triggered selling pressure on Wall Street and initially boosted the US Dollar, although it later retraced some of its gains.

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Chart XAUUSD by TradingView

According to technical analysis, the XAU/USD pair is moving lower to reach below the previous low on June 23rd, 2023, and is able to reach the lower band of the Bollinger Bands. Currently, the price is slightly higher than the lower band, suggesting a potential upward movement towards the middle band of the Bollinger Bands. The Relative Strength Index (RSI) is currently at 40, indicating that the XAU/USD is in a neutral but slightly bearish condition.

Resistance: $1,921, $1,932

Support: $1,903, $1,890