Volatility has driven the US equity market in the past week, with multiple bank failures sparking the risk-off mood in the market. As these lenders received lifelines from various sources, these fears eased, with lower expectations surrounding the Federal Reserve’s interest rate decision keeping the bulls on their toes. The S&P 500 futures (CME: ES) ended the week in the green but with volatility that could scare away the most confident traders. 

Before the crises surrounding the banking sector arose, the market expected the Fed to consider a 50bps rate hike in Wednesday’s meeting. However, traders moved swiftly to price in a lower hike in the previous week, with a 56% expectation around a 25bps hike and 44% expecting the interest rates to remain unchanged, according to the CME FedWatch Tool. As these odds are not leaning significantly towards either side, the market could be in for a surprise on Wednesday, opening the door for more volatility. 

Technical 

On the 1D chart, the volatility is evident in the formation of lower highs and lower lows, with steeper downturns driving the trend. In recent weeks, the risk-on sentiment came and went but was enough to drive a shorter-term recovery from the longer downtrend. With no major economic driver in the upcoming days, traders could anticipate the interest rate decision on Wednesday to position themselves in the market. 

The bulls managed to retrace some of the monthly losses last week, edging close to the 38.20% Fibonacci retracement level. However, with the bears currently holding the momentum, cautious traders could drive the futures toward 3911.75 to consolidate in anticipation of Wednesday’s decision. 

A 25bps hike could open downside potential, as a large portion of the market expects a more dovish reaction. Therefore, it could entice the bears to push lower to 3881.00 and 3825.00 in a continuation of the longer downtrend. 

On the other hand, a rate hike pause could tease the bulls to enter and potentially rebound off 3911.75 to retrace some of the downtrend. In this case, they could meet resistance at 3965.50 and 4009.00 on their way to the 61,8% golden ratio at 4052.25. This could signal the reversal of the longer-term trend from bearish to bullish, with the risk-on sentiment driving returns. 

Summary 

With no major economic events preceding the interest rate decision, the market could be driven by sentiment over the next two days. A shift to 3911.75 is on the cards, whereafter a 25bps interest rate hike could catalyse a leg down to 3881.00 and 3825.00. 

Sources: Koyfin, Tradingview