Weekly Focus: All Eyes on Fed

The S&P 500 broad market index futures are up by 0.3% to 5140 points on Monday, indicating a recovery after a 0.7% slump on Friday. This decline marked the second consecutive week of negative performance for the index, but it appears more like a minor correction ahead of an important event.

Investors are eagerly awaiting the Federal Reserve (Fed) decision on interest rates, scheduled for Wednesday. While no changes are expected at this meeting, all eyes are on Fed Chair Jerome Powell's rhetoric during the subsequent press conference, as well as the dot plot projection of FOMC members for the outlook. In December, FOMC members projected three interest rate cuts for 2024 when headline inflation stood at 3.4% YoY. Despite a slight decrease to 3.2% YoY in February, it may not be enough to convince policymakers to maintain their expectations of three cuts this year.

Powell's tone could also influence market sentiment, and he may continue with a "hawkish plateau" regarding interest rates given ongoing strong macroeconomic data and rising inflation. The recent surge in oil prices may further prompt the Fed to delay the first interest rate cut until at least June. However, this scenario is uncertain, with investors now giving it a 55.4% probability, down from 59.6% last week. The rapid increase in U.S. 10-year Treasuries yields, reaching 4.32%, adds to the cautious sentiment.

Investors are showing caution, with only $715 million in capital inflows to the SPDR S&P 500 ETF Trust (SPY) last week, significantly lower than the average. This suggests a wait-and-see approach ahead of the Fed meeting. Other central banks, including the Bank of England, Reserve Bank of Australia, Swiss National Bank, and potentially the Bank of Japan, will also announce interest rate decisions this week.

Some important macroeconomic data like manufacturing and services PMI in the United States will be released this week. There is a bulk of other information, but it all should be interpreted correctly only after the Fed will announce its decisions.

The S&P 500 index has exceeded the final upside target zone at 4850-4950 points and missed potential correction opportunities. Betting on a rally before a correction could be risky, with reversal patterns indicating a standard correction of 5-7% within the next three weeks. The starting point of this correction is yet to be defined, but potential downside opportunities may emerge by the end of March. The nearest resistance is at 5210 points, while support is at 5110-5130 points.

Oil prices went above $86.00 possibly reacting to higher crude inventories in the United States and global oil deficit in 2024 projected by International Energy Agency. Escalation between Israel and Hezbollah in Lebanon may also play some role in rising prices. The nearest resistance is at $87.00-92.00 per barrel, while the support is at $81.00-83.00 per barrel.

Gold prices, having reached mid-term upside targets at $2000-2100 per troy ounce, established a new all-time high at $2195. Prices are retreating a little from this level. The nearest resistance is at $2210 per ounce, while support is at $2110-2130. A technical period favorable for downside scenarios has started. It will last by the mid-April.

The currency market is waiting for the Fed meeting. The EURUSD has to return above 1.09400 to continue up. It remains risky to bet on both the rising and declining EURUSD, with a return to the 1.11500-1.12500 area likely, but a drop to 1.05000 should not be excluded. Elevated volatility is expected ahead of the Fed meeting on March 19-20.