S&P 500 And Dollar Outlook Sees Range Breaks Whether Through Fundamentals Or Necessity

• The Trade Perspective: S&P 500 Bearish Below 4,000; EURUSD Bullish Above 1.800; AUDNZD Bearish Below 1.1100
• Despite the past week's controlled range for the S&P 500 and Dow and low volatility readings, breakouts are highly likely in the days ahead
• Top thematic risk in the next five-day stretch is a focus on monetary policy from Fed to ECB to RBA; but the OECD's growth forecasts will hit an impressionable market

Despite the sizable gap lower to open Friday's session – the Dow suffered its worth jump lower since February 24th – the benchmark US indices would not clear the range established over the past week. We could view this as a market finding stability against unrelenting fundamental threats such as a rapidly rising interest rate forecast and capsizing growth forecast, but I see it in a more cynical light whereby the technical boundaries are temporary props against an inevitable fundamental ignition. Given the prevailing topics of conversations among investors and traders are inflation, tighter monetary policy and fading growth prospects; the greater potential is for a meaningful break lower. That said, I will wait until the move occurs and perhaps hold back conviction until momentum is established. Defining the technical backdrop with which we are working, I believe the S&P 500 to lay out the levels well with the past week's trading span stretching from approximately 4,175 to 4,075. Statistically, the 5-day ATR (a measure of actual volatility) has cooled relative to the past two months, but the trading range over that same period was the second most restrictive of the year. In other words, a breakout is a high technical probability.

Chart of S&P 500 with 20-Day SMA, Daily 'Wicks' and 20-Day ATR (Daily)

Chart Created on Tradingview Platform

A five-day ATR and historical range on the most representative speculative benchmark is one thing, the longer-term statistic reflections of the financial system offer a more judicious picture of our circumstances. While the VIX volatility slide lower to below 25 this past week, it was the VVIX (volatility of volatility measure) that still reflects a market that is dangerously aloof amid well-established fundamental troubles that worries me. A measure that essentially gauges the risk of a sudden rise in volatility and/or change in direction for the underlying (the S&P 500) fell seven consecutive trading days through Friday – matching the longest slide in nearly five years. Given the market's reflection on 'risk' this strikes me as a threat to sudden tumbles in the capital markets and the sentiment they project. Adding to this directional risk are certain measures of financial risk. There are many – mostly esoteric – measures of financial pressure gauges, but below we have the difference in three month market (commercial) to risk free (Fed Fund) rates. At its current height, we are generally at levels that are only comparable to the pandemic and then the 2008 Great Financial Crisis.

Chart of VVIX 'Volatility of Volatility' Index and US 3-Month Commercial-Fed Rate Spread (Weekly)

Chart Created on Tradingview Platform

I never write off the possibility of a particular scenario in market development, but our entire venture into capital markets is a practice of probabilities. There is no major source of systemic risk appetite in the major themes that continue to unfold – only points of relief to serious threats. Alternatively, the negative pressures are a growing threat that are perhaps made more threatening due to the recent relief rallies we've seen in some benchmarks. From the economic calendar in the week ahead, I believe that there is a likely skew in influence towards monetary policy – though the ends to that means is theoretically 'risk trends'. The second half of the week carries greater overall potential than the first half with the OECD growth forecasts on Wednesday, ECB rate decision on Thursday and US CPI on Friday as my top global influencers.

Calendar of Major Economic Event Risk

Calendar Created by John Kicklighter with Data from BLS and ADP

Within the construct of monetary policy, there are a range of central bank rate decisions that are worthy of observation and interpretation; but their global impact is still less provocative than that of the Federal Reserve. That is perhaps an aggressive claim considering that the US central bank will be all but silent between Saturday June 4th through Thursday June 16th. That is because we have entered the group's self-imposed media blackout period where members avoid offering updates on their views of monetary policy, economic outlook or other topics of relevance to global investors to help curb their unintended impact on market volatility. As noble a cause as that is, the absence of Fed guidance leaves it exposed to the whiles of speculative interpretation which is far more volatile in nature. If you are monitoring the status of US rate speculation, I believe the attention around the September 21st meeting is the leading front. A June 15th and July 27th 50bp hike have been priced in for some time. The chance of another half percent rise in the subsequent meeting is where the biggest swings have occurred – from 37 percent a week ago to 69 percent to end this past week.

Table of Probable FOMC September Rate Level According to Fed Fund Futures

Chart Created by John Kicklighter

If monetary policy is a top theme, then there are a few pairs I believe traders should be watching. Overall, if interest rate speculation touts a general influence over the financial system, then the Yen crosses will be important to monitor. They benefit from growing yield differentials, but a steady or rising appetite for 'risk' is essential to lift. More specifically, the relative policy perspective should set EURUSD at the top of our watch list. While there are different economic charges on tap for the Euro and Greenback, the heavy hitters ahead are Thursday's ECB rate decision and the US CPI on Friday. The potential of a break from 1.0800 – 1.0635 is growing, but will the markets wait until the very end of the week to trigger the move? I consider the official rate decision to carry greater potential than the US data point, but the ECB will likely attempt to curb volatility as much as possible whereas the data is objective in nature.

Chart of EURUSD with 20 and 100-Day SMAs (Daily)

Chart Created on Tradingview Platform

Among other major central bank rate decisions on tap this week; traders would do well to watch Tuesday's RBA expected 25bp hike, the Reserve Bank of India's anticipated 40bp increase and the Russian 100-200bp forecasted cut. However, these are all developments that will struggle to connect to the global view on financial and economic health. Tightening may be an important macro trend, but it is generally an influence on a much larger theme: economic potential. This week, we don't have near the run of growth-oriented event risk that we have seen in previous weeks, but that doesn't mean the market's will simply find relief in the silence. This past week, we have received growth warnings from Tesla CEO Musk, JPMorgan CEO Dimon and Goldman Sacks COO Waldron. Forward-looking concern bests backward looking data any day. That said, we are also do a new set of forecasts for the broader economy on Wednesday with the OECD's GDP outlook update. Keep tabs on the figures.

Table of Major Economies Forecasts for 2022 and 2022

Chart from IMF's WEO Spring Outlook

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