Today the United States celebrates Independence Day, which is why banks and stock exchanges in the country will be closed. In this regard, especially during the American trading session, trading volume is expected to be low. However, a sharp short-term increase in volatility in a thin market cannot be excluded. Today's macroeconomic calendar is bereft of important releases. Thus, trading activity is subdued. At the moment of preparing this article, the US dollar index (DXY) was trading at 104.84, the level at which today's trading day began.
The US dollar is still taking the lead in financial markets, while major US stock indices remain under pressure from expectations of the Fed's further monetary policy tightening. Investors are opting for the greenback. It continues to gain value, sparking interest from strategic investors who prefer a stable, almost guaranteed long-term income. The dollar is also in demand as a safe-haven asset, thus putting pressure on other traditional safe-haven assets such as the yen, gold, and US government bonds. Their yield declined last week due to slight growth in demand for government bonds, but it continues to remain at a level not seen in more than three years. Thus, the yield on the benchmark 10-year Treasury note is currently 2.889%, corresponding to the level posted in December 2018. Gold also fell to the mark of 1,800.00 dollars per ounce. Notably, the metal spent most of last year near that balance line.
Market participants are awaiting the Fed's further interest rate hike to 4.0%. This was stated by New York Federal Reserve President John Williams last week. The policy maker said he supports raising the Fed's benchmark interest rate to a range of 3% to 3.5% by later this year and around 3.5% to 4% next year. He also added that at the July meeting of the regulator (July 26 and 27), officials would consider another 75 basis-point increase, or a 50 basis-point hike.
The Fed is pursuing the most aggressive tightening of monetary policy in decades, rapidly winding down stimulus measures that have fueled inflationary pressures. The central bank's measures are aimed primarily at fighting inflation, which has hit the highest rate in four decades.
"Inflation is much too high and we understand the hardship it is causing. We are strongly committed to bringing inflation back down," Fed Chairman Jerome Powell said at a press conference following the May meeting. Currently, the Fed interest rate is at 1.75%, and market participants expect the regulator to increase it further.
As for the US stock market, its major indices (the S&P 500, the Dow Jones Industrial Average, and the Nasdaq 100) have posted heavy losses this year, after reaching record highs at the very end of last year.
At the moment of preparing this material, the S&P 500 index (#SPX) was trading around 3,821.00 mark, having recovered from the strongest fall since the beginning of the year to the key support level of 3,645.00, which separated the long-term bullish trend from the bearish one.
Despite the current upward correction, market sentiment on the S&P 500 and the entire US stock market remains bearish. Investors prefer the US dollar.
Volatility in financial markets is expected to pick up again tomorrow after the Reserve Bank of Australia announces its decision on interest rates. The more unexpected the decision of the regulator, the stronger market volatility will be.