In this article, we’ll focus on the US economy, and try to understand how the domestic stock market influences the mighty “greenback.” Specifically, we’ll look at the S&P 500 index, and how a changing S&P sentiment so often affects the direction the dollar is moving in comparison with other major currencies. Is the delay between stock movements and currency reaction the ideal early warning system for Exness traders to forecast profitable trades?
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Trading forex using index movements
Generally, when the S&P 500 index demonstrates a bullish move, the US dollar is positively influenced and moves up against other major currencies. This is because a good state of the US stock market attracts foreign investments on American soil, which in turn increases demand for US dollars internationally.
On November 19, the S&P 500 index was trading at 2,736 points, which is close to the same level as where it started the month. In October, the index demonstrated the worst monthly performance since 2011, losing about 7%. The bearish sentiment was supported by fears that the Federal Reserve will continue to hike interest rates in the US, which may work to cool down economic growth in the country. In addition, tensions in the US-China trade relationship did not exactly ease investors’ worries either.
The question now is what we can expect going forward, both in terms of the direction of the S&P and the dollar. As usual, we invited two market analysts to share their opinions – so here we go!
S&P500 will lift the mighty USD!
The stock market collapse from October was unexpected, and some experts agree that it was a market correction rather than the start of a long-term bearish trend. Usually, bear markets start in a slower and more gradual manner.
Thus, once the correction ends, which is probably right around the corner, the S&P 500 might reach new highs. Whether we’ll see it in December this year or in January of next year is difficult to say, but it’s certainly coming very soon. Remember that the last all-time high for the S&P was reached at the end of September 2018, and the market is now more than 6.5% down from that peak – stocks are simply not that expensive anymore!
If the S&P 500 and other indices resume their bullish trends, this will definitely push the US dollar higher against other currencies. Watch out for the US dollar Index (DXY) breaking through its previous high at around 97.50, which was touched on November 12.
The S&P500 will fall dragging the bloated USD down!
Although some experts claim that the current correction is just a short-term one, technical indicators suggest they are wrong, and that the S&P is still headed lower from here. Judging from trend indicators and some of the oscillators, December is about to end in red, and the market correction will last much longer than expected by the bulls.
Most of the technical analysis indicators are now showing readings in the neutral to bearish area for the S&P. For example, all of the slower moving averages, both the simple (SMA) and exponential (EMA) ones, are pointing to a continued downward trend.
On the other side, however, some of the faster moving averages such as the 5 SMA or the 20 SMA, do indicate short-term “buy” opportunities, but it’s important to remember that the longer-term indicators are the most important ones, simply because they cover a much larger data sample.
Both the MACD and Stochastic indicators are right now in a neutral zone, but they are likely to reach overbought levels soon, which would add further downward pressure on the S&P.
As the chart below shows, there is also a lot of room left to fall before the market reaches the support area formed by the low from mid-October. It’s likely that we will at least have to go down and test that level again before we can move any higher.
Forex traders stand at the ready for a USD spike
As already mentioned by our expert, the US dollar is capable of moving independently from the stock market and is sometimes influenced by completely different factors. This has been demonstrated in the past, but it’s still the exception to the rule. What will be the case this time still remains to be seen, and we may be looking at a very uncertain and volatile December both in the S&P 500, as well as most of the currency pairs involving the US dollar.
Whenever a breakout occurs, the goal of all traders is to move fast to maximize profits. For now, we suggest you check FX News on a regular basis. Keep your finger on the pulse of the global financial markets, be patient, and get ready to ride the next volatility wave and take full advantage.
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