Frustrating.

That’s how I’d describe the Fed’s latest performance… and Fed Chair Jerome Powell has certainly made the Fed an easy target for angry investors.

You see, there are two parts to “Fed Day.”

The first part is at 2 p.m. ET – when the market finds out what the Fed’s interest rate decision is.

Now, I’ll give the Fed some credit. Their 75-basis point hike was well telegraphed.

The market has been expecting this interest rate hike for a while. If the interest rate increase was unexpected, then the action on Wednesday could’ve been worse.

The Fed also releases their latest policy statement at the same time as their interest-rate decision.

This allows investors to see what (if anything) has changed from the prior statement.

The policy statement is crucial because it can give the market insights as to what the Fed is going to do next.

The initial reaction to the new statement was quite positive and the market rallied sharply for a few minutes…

That’s because the new statement said the Fed was considering the cumulative impact of its rate hikes to date.

The market interpreted this to mean that the Fed would soon slow down the pace of future interest rate increases.

But then… part two of the meeting began.

At 2:30 p.m., Jerome Powell answered questions from the financial media… it’s typically where the fireworks will happen.

A haphazard remark or a throwaway comment can wreak havoc on the markets.

But what happened wasn’t so benign as a careless off-the-cuff comment.

Instead, Powell pulled off the timeless bait-and-switch.

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He started off strongly by hinting that a slowdown in rate hikes could come as soon as the next meeting, or possibly the one after that.

But then, he inexplicably switched tracks.

Powell went on to say it was too premature to think about pausing hikes and that recent data points to interest rates having to go higher than previously expected.

The market, predictably, sold off hard with the S&P 500 closing 2.5% lower.

I’m not going to pile on with the Fed bashing that I’m sure you’ve been seeing in the news.

The Fed’s an easy target. What’s not so easy is figuring out where we go from here.

But I see one market that’s giving the strongest clue – the U.S. dollar.

A side effect of the Fed’s policy decisions has been a surging dollar, which has been a drag on the stock market.

Check out this chart below to see what I mean. The red line represents the U.S. dollar, and the black line is the S&P 500…

You’ll notice how both markets have moved in opposite directions from one another since the start of 2022.

And while it’s no guarantee the stock market will bottom if the dollar reverses course… I do think that’s one key variable we should be on the lookout for.

It’s hard to imagine the stock market having a sustained rally while the dollar continues to surge.

The good news is that there’s a very clear and obvious level of resistance that the dollar is heading toward.

Check out this chart below of the U.S. dollar index (DXY)…

It appears the DXY is being pulled toward that 2002 high at 120.28 (lower red line).

Multi-year highs often serve as strong resistance, and it should be very difficult for the dollar to break through that 120.28 level.

I’ve also included the 1985 high as a frame of reference (top red line).

Back then, interest rates were close to 10%.

The current Fed funds rate would have to more than double for the dollar to head that high.

It remains to be seen if 120.28 will cap the dollar’s incredible strength… but it’s undeniably an incredibly important level for us to keep an eye on.

I’ll be looking to buy the dollar on dips as we trade closer to that level.

Once we get there, I’ll be on high alert for technical signs of a potential dollar reversal.

Whether that means the stock market will also bottom out remains to be seen.

Of course, I’ll be sure to keep you updated through the market’s various twists and turns.

Happy trading,

Imre Gams
Analyst, Market Minute

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