NewsWire: Watch the dollar and euro this week
The most notable events this week are policy announcements from the Federal Open Market Committee (FOMC) and the European Central Bank (ECB), and the resulting moves in the dollar and euro. A drop in the dollar could boost the S&P 500 given the number of multinational corporations within the index (roughly 47% of sales). Conversely, any strength could weigh the index.
In late January into early February, inflation concerns began to rise. Monthly wages saw a pick-up, oil started a move higher, and there was a change at the top of the Fed. Hedge Fund managers who were short the market began their assault, arguing the rise of inflation.
Then the Fed’s perception changed. Centrist Jerome Powell replaced former chair policy-dove Janet Yellen. The shorts promoted this change as the Fed becoming more hawkish (inclined to tighten policy). Mr. Powell obliged the inflation camp by talking up growth at his ensuing speeches. So, the dollar began to rally, weighing on the S&P.
At the same time, eurozone economic data began to moderate. German trade and industrial production fell, and similar signs were materializing in France. Concerns had increased to the point where ECB head Mario Draghi had to address the issue. He admitted growth had slowed but thought it was temporary. This weighed on the euro, further pressuring the S&P.
Mid-May, FOMC members voiced a willingness to let inflation overshoot before changing their policy stance. This shot holes in the short argument, boosting the S&P.
Then last week, ECB policy makers changed perception as well. They said asset purchases could stop by the end of this year, starting a rally in the euro.
If the FOMC eases concerns about the path of rate hikes while the ECB talks up tightening, expect a market rally this week. If the Fed talks up tightening policy and the ECB moderates, expect a market drop.
Everything else is noise.