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Powell’s dovish tilt is enough to lift markets

Markets rallied into the close last night as initial interpretations of Jerome Powell's Federal Open Market Committee (FOMC) comments were thought to imply a dovish tilt from the head of the Federal Reserve.

Whether this really was a dovish tilt, or just irrational exuberance on the part of traders and investors, remains to be seen. Certainly, traders were bullish, and we saw the major US indices post strong closes. The S&P 500 Index, for example, closed 2.6 percent higher on the day.

This is a curious price action anomaly for traders to decipher. On a day when the Fed raised its benchmark overnight interest rate by three-quarters of a percentage point, and implied further rate rises ahead, we saw equity markets rally.

It should be remembered that the biggest rips occur during bear markets, and today’s price action post-FOMC announcement is an excellent example of that.

Markets had expected the 0.75 percent raise at today’s meeting. Where the bullish exuberance came from is the implication that while there is likely to be a rate rise at the next meeting in September, it is unlikely to be as big as today’s rate rise.

Within the US, the most recent data has shown consumer prices rising at more than a nine percent annual rate. Yet investors expect the US central bank to only raise its policy rate by half a percentage point at its September meeting.

Futures markets in particular are tied to Fed policy expectations, and they tilted slightly back toward a more moderate increase for the next meeting.

So, who were the immediate winners and losers from the FOMC announcement?  We had the NASDAQ adding nearly 470 points, closing up four percent, whereas the dollar index slid into support.

NASDAQ

Once the darling of the pandemic investing crowd, the NASDAQ has had a tough time since last November, as the chart below shows.

1W chart for NASDAQ (Source: OvalX)
Historical performance does not guarantee future profits.

The NASDAQ topped out in November 2021 at 16764. Technical traders were quick to see that price printed a Bearish Engulfing/Key Reversal Candle that week as well - an ominous sign. The price then developed into a scruffy double-top reversal pattern before the downtrend asserted itself. Of interest to traders was the price reaction to odd big round numbers at 15,000, 13,000 and 11,000. It was the latter acting as recent support which traders were hoping would hold as a low for the present move.

Those hopes have been realised – so far.

1D chart for NASDAQ (Source: OvalX)
Historical performance does not guarantee future profits.

When we look at the daily chart above, we can see how the price has responded at those 13,000 and 15,000 levels with more detail. We can also note that the daily price has been gaining higher highs and seeing greater lows since the low of 16 June 2022. Before we get carried away, it would be prudent to wait and see if the NASDAQ can trade back above 13,000 and hold there. That would give us an indication of bullish strength.

Dollar index

Whereas the NASDAQ has been riding high, the dollar index has continued to slide in the last few sessions. The implication that there may well be fewer - and smaller - interest rate rises in the near future will have taken the wind out of the dollar’s sails.

Having said that, the dollar index has been on a terrific run, and it may be interesting to check the price action of the charts before considering whether the bull run on the dollar is over.

1D chart for US dollar index (Source: OvalX)
Historical performance does not guarantee future profits.

The dollar has been on a fine bullish run in 2022, but all good things must come to an end…. or at least take a pause. This is what we see in the dollar at the moment. Having rallied strongly during June and early July to decade highs, we have seen the price sag over the last two weeks. This is for several reasons.

From a technical point of view, we see the price now sat on a daily support level of 106.50. Should that break, the price could drift down to the daily supporting trendline in the region of 105. While that would be quite a retracement from the highs of early July, it is still demonstrating a strong dollar, and that a dollar bullish trend is intact - it’s just taking a breather. We may have to wait for the clear indication of the end of dollar strength.

Traders will now turn their attention to the Thursday trading session. There we may see a clearer indication of trader and investor sentiment once they’ve had some time to assess the impact of Powell’s comments.

Please note that the presented content refers to the Oval group which contains two legal entities: Monecor (London) Limited authorised and regulated by the UK Financial Conduct Authority (FCA) with Financial Services register number 124721. Monecor (Europe) Limited authorised and licensed under the Cyprus Securities and Exchange Commission (‘CySEC’) with license number 096/08.