Stock Market Reacts to Fed’s Mixed Signals on Rate Hikes and Inflation

June 15, 2023

Stocks experienced volatility on Wednesday as the Federal Reserve took a pause in its rate-hiking campaign while signalling progress in combating inflation. Despite this, the central bank also indicated its intention to implement two more rate hikes later in the year.

The S&P 500 managed to eke out a marginal gain, closing at 4,372.59 with a 0.08% increase, while the Nasdaq Composite saw a 0.39% rise to end the session at 13,626.48, supported by strong performances from Nvidia and AMD.

On the other hand, the Dow Jones Industrial Average dipped by 0.68%, or 232.79 points, closing at 33,979.33, primarily due to losses in UnitedHealth. Notably, both the S&P 500 and the Nasdaq reached their highest levels since April 2022 during the trading session.

As anticipated by traders, the Federal Reserve announced the maintenance of unchanged interest rates, breaking a streak of 10 consecutive rate hikes. However, the markets initially responded negatively as investors focused on the central bank’s projections, which indicated an imminent resumption of rate hikes. Ed Moya, senior market analyst at Oanda, expressed concerns over the Fed’s forecast, stating that the statement and projections were so hawkish that Wall Street may regret not raising rates that day.

Nonetheless, the sell-off stabilized to some extent when Fed Chair Jerome Powell, during the subsequent press conference, revealed that no decision had been made regarding the July meeting and emphasized the Fed’s progress in tackling inflation.

With the S&P 500 up over 13% this year and more than 25% from its bear market low, investors had been betting on the Fed’s impending cessation of rate hikes. Furthermore, recent economic indicators, such as May’s producer price index and consumer price index, have fueled optimism that the Fed is effectively combating inflation. The Federal Reserve’s next meeting is scheduled for July 25-26.

All sectors performances in reaction to Fed's mixed signals on rate hikes and inflation.

Data by Bloomberg

On Wednesday, the stock market witnessed mixed performances across various sectors. The Information Technology sector led the gains with a significant increase of 1.14%. Consumer Staples and Real Estate sectors also recorded positive growth, rising by 0.56% and 0.32% respectively. Communication Services saw a modest gain of 0.13%.

However, several sectors experienced losses, with Energy and Health Care both declining by 1.12%. Financials, Materials, and Industrials sectors also faced declines of 0.37%, 0.43%, and 0.29% respectively. The Utilities sector saw a slight decrease of 0.07%, while Consumer Discretionary recorded a minor loss of 0.11%. Overall, Wednesday’s trading session displayed a mixed performance across sectors, reflecting the varied market dynamics of the day.

Major Pair Movement

The US Dollar Index (DXY) dropped to its lowest level in a month, reaching around 102.95, as market sentiment leaned towards a dovish stance for the US Federal Reserve (Fed). The Fed decided to keep interest rates unchanged, signalling a pause in the rate hike trajectory.

However, the Fed Chair, Jerome Powell, delivered a bullish speech and hinted at a possible rate hike in July. The dot plot projections showed an increase in rates for 2024 and 2025, and the median rate forecasts suggested two more rate increases in 2023.

Despite the hawkish signals from the Fed, the EUR/USD continued to rise and closed at its highest level in a month above 1.0800. Attention now shifts to the upcoming European Central Bank (ECB) meeting, where a 25 basis point interest rate hike is expected.

The language used in the ECB’s statement and President Lagarde’s comments during the press conference will be crucial for the Euro’s performance. If the meeting turns out to be dovish, with hints of a potential pause in rate hikes, the Euro could face downward pressure. In the meantime, market focus will also be on key US economic data such as Retail Sales, Jobless Claims, and the Philly Fed Index.

Picks of the Day Analysis
EUR/USD (4 Hours)

EUR/USD Rises to Monthly High Despite US Dollar Recovery and Hawkish FOMC; Focus Shifts to ECB Meeting and US Data

The EUR/USD pair achieved its highest daily close in a month above 1.0800, disregarding the US Dollar’s rebound following the hawkish stance of the Federal Open Market Committee (FOMC). Market attention now turns towards the upcoming European Central Bank (ECB) meeting and crucial US economic data, which gain significance in light of Fed Chair Powell’s indication that the July meeting will be a “live” session.

The ECB is expected to raise interest rates by 25 basis points, with the language used in the statement and President Lagarde’s comments during the press conference holding key implications for the Euro’s performance.

Meanwhile, the US dollar gained ground after the FOMC meeting, as the central bank hinted at future rate hikes and projected additional tightening measures by year-end. Market sentiment will likely be influenced by the Fed’s decision and forthcoming US economic indicators, including Retail Sales, Jobless Claims, and the Philly Fed Index.

EUR/USD pair movement reaction to Fed's Mixed Signals on Rate Hikes and Inflation

Chart EURUSD by TradingView

According to technical analysis, the EUR/USD pair experienced an upward movement on Wednesday and was able to reach the upper band of the Bollinger Bands. It then slowly moved lower, targeting the middle band of the Bollinger Bands. The Relative Strength Index (RSI) is currently at 55, lower than the previous higher movement, indicating that the EUR/USD might be returning to a neutral stance.

Resistance: 1.0847, 1.0893

Support: 1.0757, 1.0721

XAU/USD (4 Hours)

XAU/USD Holds Steady Amidst Dovish Fed Outlook, Focusing on Monetary Policy Announcement and Dot Plot

XAU/USD maintains modest gains within the $1,950 price range as investor sentiment improves following US inflation data supporting a dovish Federal Reserve (Fed). The Consumer Price Index (CPI) rose slower than expected in May, while the Producer Price Index (PPI) contracted, indicating downward pressure on prices and validating the Fed’s previous monetary policy measures. Although concerns persist over a tight labor market potentially driving inflation higher, policymakers have anticipated a more dovish approach and a meeting-by-meeting decision.

The market expects the Fed to hold its current stance, with the upcoming monetary policy announcement, dot plot release, and Chairman Jerome Powell’s press conference being the focal points. Market optimism regarding a conservative Fed aiding the economy in avoiding a recession has led investors to seek high-yielding assets, temporarily overshadowing XAU/USD. However, if the Fed deviates from market expectations, significant price volatility can be anticipated, with XAU/USD responding to fluctuations in the broader strength or weakness of the US Dollar.

XAUUSD pair movement reaction to Fed's Mixed Signals on Rate Hikes and Inflation

Chart XAUUSD by TradingView

According to technical analysis, the XAU/USD pair is moving lower creating a push to the lower band of the Bollinger Bands. Currently, the Relative Strength Index (RSI) is at 36, indicating that the XAU/USD is still in a bearish condition.

Resistance: $1,955, $1,972

Support: $1,932, $1,913

Economic Data
CurrencyDataTime (GMT + 8)Forecast
AUDEmployment Change09:3018.6K
AUDUnemployment Rate09:303.7%
EURMain Refinancing Rate20:154.00%
EURMonetary Policy Statement20:15
USDCore Retail Sales m/m20:300.1%
USDEmpire State Manufacturing Index20:30-15.0
USDRetail Sales m/m20:30-0.2%
USDUnemployment Claims20:30246K
EURECB Press Conference20:45