US stocks took an unexpected turn on Monday, considering the poor performance of European stocks and the low-risk sentiment. The DAX and the CAC mainly saw downward price movement throughout the day but ended the day around the open price. However, US stocks and equities saw bullish price action and rose to a new high. The higher number of buy orders results from dovish comments from the Federal Open Market Committee. In addition to this, investor confidence may have also risen due to the upcoming earning season. Earning season will officially be in full swing from Friday onwards.
Due to the dovish comments from the Federal Open Market Committee, some investors are lowering their interest rate expectations. Very few economists are pricing in a rate cut, but there is now a higher number pricing in a “pause”. The CME Fed WatchTool is advising there is a 13.1% possibility of a rate hike in November. Whereas last week there was a 25% possibility, and last month a 43%. As a result, the US Dollar Index experienced a significant decline. The US Dollar Index fell from 106.33 to 106.00. However, the index is currently 0.10% higher this morning.
However, traders should note that this largely depends on two economic releases. The FOMC Meeting Minutes are known as a “lagging” indication and will only confirm the FOMC member’s previous expectations. At the same time, tomorrow's Producer Price Index and the consumer inflation on Thursday will confirm if a hike is an option. If inflation exceeds expectations, a hike will become the most likely outcome again.
Dow Jones - Earning Season and Inflation in Focus
The Dow Jones was the second-best performing US index after the SNP500. However, the Dow Jones will also be the most influenced by the upcoming earnings data. This is due to the index’s exposure to the banking sector and defensive stocks. The Index will likely experience significant volatility on Wednesday and Thursday after the inflation data. However, volatility will also be high on Friday due to the quarterly earnings reports from UnitedHealth Group and JP Morgan.
- UnitedHealth Group – Expected Earnings Per Share $6.33 – Holds a “weight” of 10.26% – Risen by 9.83% over the past month.
- JP Morgan – Expected Earnings Per Share $3.85 – Holds a “weight” of 2.84% – Price has neither risen nor depreciated over the past month.
If inflation reads lower than the current expectations and the two Quarterly Earnings reports show higher than expectations, the Dow Jones is potentially likely to experience a bullish trend. UnitedHealth Group has beat Wall Street’s EPS and Revenue expectations over the past four quarters. Analysts expect the company to publish more substantial revenue and earnings compared to the previous quarter. JP Morgan has also beat expectations over the past year, and the stock rose by 38% over the past 12 months.
The Dow Jones on Monday only saw 9 of the 30 stocks decline, whereas to see a significant downward trend, investors want to see at least 20 stocks in the red. Procter and Gamble saw the most substantial reduction, which declined by 0.51%, nothing extreme. The best-performing stocks were Chevron, Walgreens Boot Alliance and Walt Disney, which all rose by more than 2%.
When monitoring order flow data, the Dow Jones ended the day with a significantly higher level of buy orders than sell and considerably higher than the VWAP. Order flow this morning is also signaling higher buy orders, indicating bullish price movement. The index trades higher than the 100-bar EMA, forming a bullish crossover at 07:00 GMT. In addition, bond yields have taken a significant hit, falling 0.104%, which is positive for the stock market. Another positive factor is the upward price movement this morning in Europe. The only concern for investors is the upcoming inflation data.
EUR/USD - Inflation Will Determine the Dollar’s Outlook
The exchange rate is experiencing a reverting market and is forming a symmetrical triangle pattern. This indicates investors are not holding onto trades in the longer term and believe the EUR/USD is appropriately priced. However, this is likely to change after the US inflation data. If inflation data reads weaker than expected, the Euro is likely to strengthen against the Dollar. The US Dollar this morning is experiencing mainly bullish price movement and has only seen some pressure against stronger currencies such as the Euro and the Pound. Conversely, the Euro is increasing in value against all other currencies bar the Swiss Franc.
Analysts note that in the Eurozone, and especially in Germany, the economic situation remains poor, and recessionary trends persist. According to an interview with the head of the European Central Bank (ECB), Christine Lagarde, published by the French newspaper La Tribune Dimanche, interest rates in the region have reached levels that will allow inflation to return to the target level of 2% after some time. Most economists agree that the European Central Bank is unlikely to hike again in the current year and 2024. Nonetheless, a dovish Federal Reserve can still support the exchange rate.
When monitoring technical analysis, the price of the exchange is trading above the 100-bar EMA and the standard deviation. Both indicate buyers have control of the exchange, but the price also forms a symmetrical triangle. Therefore, signals are conflicting, most likely due to the upcoming inflation data. If the price breaks above 1.05830, buy signals will likely become stronger. However, investors should be cautious of the resistance level. According to economists, the future outlook of the Dollar cannot be sure until the US releases its producer and consumer inflation data. If further interest rate hikes are removed as an option, the exchange rate can potentially rise to 1.07700 in the medium term.
Summary:
- The Dow Jones witnesses more buy orders as earnings season approaches.
- Traders of the Dow Jones will concentrate on inflation and the quarterly earnings reports from UnitedHealth and JP Morgan.
- Analysts believe UnitedHealth, the index’s most influential stock, will publish more robust earnings and revenue.
- JP Morgan beat expectations over the past year, and the stock rose by 38%, supporting the Dow Jones.
- The US Dollar comes under pressure from dovish comments from Federal Open Market Committee members. The CME Fed WatchTool is advising there is a 13.1% possibility of a rate hike in November. The US Dollar Index slightly improved this morning but remains under pressure.
