Dollar Perks Up Ahead Of Fed Decision

Now and again, we check in with our technical analyst friends to hear what they’re seeing out there. And this week, they’re pointing to the U.S. Dollar Index, which recently stabilized at its year-to-date lows near 100. 👇

As for why they’re pointing this out now, it’s because of the potential inter-market relationship between the U.S. Dollar and stocks. Throughout 2022, a strong negative correlation existed between the S&P 500 and the U.S. Dollar Index. 📉

That’s because money flowed into the “safe-haven” U.S. Dollar for protection as stocks fell. And when stocks began to rally, money started flowing out of the U.S. Dollar. Notice how the index peaked in October as the S&P 500 and other stock market indexes began to rally? 

Well, that relationship could be relevant again as the U.S. Dollar finds its footing and U.S. stocks struggle to make upward progress.

Some technical analysts suggest this could be an early warning signal as the market gets a bit more cautious (or risk-averse). Essentially the inter-market argument suggests that the Dollar Index staying above 100 is a headwind for stocks, and its breaking below 100 is a tailwind. 🔮

Others suggest this is merely short covering ahead of Wednesday’s Federal Reserve interest rate decision and commentary, and we should not read into it so much. 🛑

Who is right remains to be seen. But it’s clear that this 100 level in the U.S. Dollar Index will be closely watched as traders assess the stock market’s next directional move. 👀