S&P 500: can a correction turn into a sustainable uptrend?

 
 
 
 
 
 
 

As of this writing, DXY dollar index futures are traded near 103.74, continuing to decline for the third consecutive trading day after hitting a new high since January 2003 at 105.06 on Friday.

DXY Chart

Perhaps this is how investors reacted to yesterday's New York Fed report, according to which the manufacturing activity index in the US fell to -11.60 in May from 24.60 in April, which also turned out to be much worse than the forecast for the index to fall to 15.50.

In addition, the US stock market is now seeing a resurgence of investor optimism, which is accompanied by an increase in their propensity to buy risky and profitable stock market assets and to exit the protective dollar. For example, futures on the broad market index S&P500 rose 5.4% to 4071.0 from last week's low of 3860.0.

However, most economists believe that the dollar will resume its growth: the tightening cycle of monetary policy is just beginning, and the Fed is unlikely to back down from its plans.

Fed chief Jerome Powell recently reaffirmed that the central bank's main task is to regain control of inflation, which has reached highs in the US for the past 40 years. If economic performance is in line with expectations, then Powell considers it appropriate to raise interest rates by 50 basis points at the next two meetings.

Today, during the American trading session, he will speak at an event organized by the Wall Street Journal, and market participants will be waiting for new signals from him regarding the prospects for the Fed's monetary policy. His speech is scheduled to start at 18:00 (GMT). It is possible that Powell will hint that at the next Fed meeting on June 14-15, the interest rate may be raised by 75 basis points, and not by 50, as the market expects. In this case, the dollar will receive a powerful impetus to strengthen. At the same time, US stock indices may again move down.

Otherwise, and if Powell maintains the same monetary policy rhetoric, the dollar could weaken and stocks continue to rise. The price of futures for the S&P500 index has already broken through the first serious resistance level 4052.0, "making request" for further growth. The next upside target is 4140.0 (for details, see "S&P500: technical analysis and trading recommendations_05/17/2022").

S&P 500 Chart

Of the news for today, which may also cause an increase in volatility in the market, you should pay attention to the publication at 12:30 (GMT) of the report of the US Census Bureau with fresh data on retail sales. This report (Retail Sales) reflects the total sales of retailers of all sizes and types. The change in retail sales is the main indicator of consumer spending. A high result and a growing value of the index usually have a positive effect on investor sentiment and on the US stock market. In the previous month (March), the value of the indicator was +0.5%. Forecast for April: +0.7%.