S&P 500, Nasdaq and Dow Rally as Risk-On Mood Rules Amid Soft USD

US Stock Market Key Points:

• The S&P 500, Dow, and Nasdaq 100 rally to two-week highs amid a weaker USD
• New York Federal Reserve Inflation expectations at lowest levels in months
• All eyes are on tomorrow’s US CPI and next week’s FOMC monetary policy decision

Most Read: S&P 500, Nasdaq 100: Bulls Push into CPI After Last Week’s Bullish Engulf

U.S. equity indices carried over last week’s risk-on mood and ended in positive territory on Monday, notching four consecutive days of gains and reaching their best levels in two weeks. The lack of important data on the economic calendar and a quiet session due to the Federal Reserve’s “blackout period” ahead of the September FOMC decision on September 21, likely helped risk assets.

At the close, the Dow Jones gained 0.72% while the S&P 500 rose 1.07%, driven by gains across all sectors, but particularly by a 1.83% increase in energy. Oil prices rose on Monday amid supply concerns as European governments questioned whether Iran is really committed to reviving the 2015 Nuclear Deal.

In addition, pharmaceutical stocks, such as Gilead Sciences and Bristol Myers, had a strong performance further bolstering the S&P 500. Shares of both companies gained more than 3% today.

From a technical standpoint, the S&P 500 has retained bullish momentum after closing above the 100-day SMA last Friday, with prices now tentatively approaching the psychological 4,200 level, but the real test could come at the 200-day simple moving average, where the index stalled last month.

S&P 500 (ES) Daily Chart

S&P 500 (ES) Mini Futures Daily Chart Prepared Using TradingView

Focusing on the Nasdaq 100, the tech benchmark gained 1.2%, driven by positive news from Apple, which released its new software update for iPhones. The update was long awaited as it allows for greater customization of iMessages, emails, text messages with Android users, and smarter dictation. Apple shares were up 3.85% on the day.

Risk appetite was also helped today by a weaker US dollar. The dollar depreciated against major currencies ahead of a high-impact event on Tuesday morning: US CPI data.

There is growing optimism that the inflation outlook could continue to improve. The New York Fed’s inflation expectation survey released today reinforced this sentiment. According to the report, one-year inflation expectations fell to 5.7% from 6.2% in July, a ten-month low. Meanwhile, the three-year outlook declined to 2.8% from 3.2% previously, the lowest in nearly two years.

While some traders believe that CPI has peaked, it is important to note that the Fed has been clear that the labor market remains tight, and it will not stop raising rates until inflation is well on its way to converge to the 2% target, suggesting that today’s move in the US dollar could just be a correction.

In this context, it is also worth mentioning the recent appreciation of the euro. After the ECB raised interest rates by 75bp last week, the common currency has managed to build some strength against the greenback. Hawkish comments from ECB officials, as well as Brussel’s plans to subsidize energy costs following Russia’s gambit to cut off natural gas supplies to the region, have pushed the exchange rate closer to a key topside trendline.

EUR/USD Daily Chart

EUR/USD Daily Chart Prepared Using TradingView

That said, the next important level to watch on EUR/USD is 1.0200. A close above that technical resistance could give the bulls a reason to push prices higher towards 1.0370.

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—Written by Cecilia Sanchez-Corona, Research Team, DailyFX