S&P Rally Stalls for Now

A sharp turn lower in the S&P on Friday likely reflects the growing uncertainty ahead of the FOMC on Wednesday. Hawkish risks have resurfaced in recent weeks and while the market is firmly expecting the Fed to keep policy on hold this week, expectations are more muddied when it comes to anticipating the likely forward guidance to be laid out by the bank. With fresh upside in both employment and inflation readings last month, traders sense that the Fed might have one more hike left in them which, if signalled, will likely see stocks coming under some near-term pressure.

Fed Key for Stocks

The recent uptick in US yields has acted as a barrier to further upside in stocks. Against this backdrop, the S&P is vulnerable to a sharp correction lower if the Fed comes out on the hawkish side this week. Any firm signal that the bank expects to raise rates again this year will send USD higher into Q4, leading the S&P lower. The Fed is likely to reaffirm its data dependent message, putting the focus on the next set of CPI readings, keeping its options open. With this in mind, traders will be paying close attention to the update dot plot forecasts for a sense of where the Fed might go over the remainder of the year.

Technical Views

S&P 500

The bull trend has stalled for now with price correcting lower from the 4599.19 level. 4327.80 has underpinned the move lower for now, keeping price within the middle of the bull channel. As such, risks are evenly split, however, the index is at risk of carving out a lower high here suggesting a deeper move lower to come. To the downside, if we break below the 4327.80 level, 4187.73 and the bull channel lows will be the next support area to watch.