FOMC headlines a huge week, and what next for the S&P 500

The holiday season is fast approaching.

However, before traders can take a well-earned break, a huge week lies ahead, including critical central bank interest rate meetings—chief amongst them Thursday morning’s FOMC meeting.

Following a downside surprise in U.S inflation in October, Fed Chair Powell, speaking at the Brookings Institute on November 30th, indicated that the pace of Fed tightening was set to slow from 75bp to 50bp.

He stated, “It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down.” This is a “good way to balance the risks” to the economy.

The markets have taken the Fed Chairs message at face value, and the interest rate market expects the Fed Funds rate to rise on Thursday by 50bp to a range of 4.25-4.50%.

Aside from the actual rate rise, the focus will be on the tone and content of the accompanying press conference and the projected peak for the Fed Funds rate in 2023.

The impressive rally in stock and bond markets, along with a sell-off in the US dollar since mid-October, has resulted in a substantial easing in financial conditions.

An easing in financial conditions is counterproductive to the Fed's aims of taming inflation and cooling the labour market. As such, the tone of the Fed Chairs press conference is expected to sound more hawkish than his speech at the Brookings institute.

There is some conjecture about whether the median Feds dot plot peak will be raised to 4.875% or 5.125%. The latter would provide the Fed with more optionality around balancing the risks of inflation verse recession.

What do the charts say?

The rally in the S&P 500 from the October 3502 low tagged to perfection the downtrend resistance at 4110, coming from the January 4808 high, and is viewed as countertrend.

The S&P 500 needs to see a sustained break above the 4100/4110 resistance zone, post the FOMC, to negate the downside risks and to suggest a more robust recovery towards the 61.8% retracement at 4310 is underway.

On the downside, a sustained break of near-term support at 3910/00, post the FOMC meeting, would likely set up a test of support 3750 area.

S&P 500 daily chart

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