Summary:

• The US500 has reached a 3-week high after gaining again yesterday
• The market has now recovered the majority of the declines from earlier this month 
• Fed chair Powell set to deliver first policy speech at 3PM; Indices, Gold and USD could all be highly sensitive to this event 

The recovery seen in US stocks since the panic-selling at the start of the month continued yesterday with the US500 hitting a 3-week high. The market rose to make a high of 2787 and in doing so traded back above the levels seen on Monday the 5th February – the day that saw the large declines. 

The market has now recovered the majority of the declines and recently broke back above the 61.8% fib retracement of the drop at 2746. This is an area to now keep an eye on for possible support. The 78.6% fib at 2805 is the next level to look for possible resistance but a clean break above there would place the momentum firmly back in the bull’s court and could lead to another test of the all-time highs at 2880.  

 The US500 has broken above the 61.8% fib at 2746 and could be set for more upside ahead. Source: xStation

Whilst the price action for this market is clearly constructive of late there remains potential threats ahead. The biggest of them all is the first testimony to Congress from the newly appointed Fed chair Jerome Powell. At 3PM GMT Powell is scheduled to deliver his first monetary policy speech since taking up the role before answering questions relating to his views on both policy and the economy. A text of the speech is expected to be released around 1:30PM.

The tone and rhetoric adopted by Powell could well be pivotal going forward with Traders in particular focused on any references to rising inflation (which was widely attributed as the main cause of the sharp sell-off earlier this month) and also any comments on fiscal policy (whilst Powell can’t impact fiscal policy directly he can influence monetary policy and this may well be impacted by the twin deficit fears.)

Should Powell play down concerns surrounding a rise in inflation and state something along the lines of a symmetric approach to inflation around the Fed’s mandate IE happy for an overshoot going forward given that it has undershot for several years, then stocks may extend their rally and the USD may turn lower. 

 The EURUSD sits at a potentially key level ahead of the speech. A possible double top has formed with RSI divergence but a break below the local lows around 1.2280 is needed for a push lower. Source: xStation

Alternatively any hawkish surprises could derail the recent recovery in equities and provide a boost to the USD, which has been in a fairly steady state of decline over the last year. a drop back below 2746 would test the mettle of longs in the US500 and could well see another push back lower to the monthly lows around 2531. 

Gold is typically one of the most sensitive markets to Fed policy, and as such traders will likely have a keen eye on the precious metal this afternoon. The trading range has been consolidating in recent weeks with 1306 providing a floor and 1365 a ceiling. On longer term charts a big inverse head and shoulders may be forming but this would require a clean break above the 1365 region. The CPI reading earlier this month saw a volatile trading day as the latest inflation data saw the market first drop lower before rallying strongly to the upside, with the high of the day some $36 (almost 3%) off the lows. Should Powell provide any fireworks this afternoon then a comparable move, or even a bigger one, is entirely possible.    

 Gold had a big reaction to the CPI release earlier this month and could have a similar size move if Powell delivers any surprises later on. Source: xStation