The S&P 500 saw a strong rise after Federal Reserve Chair Powell hinted at possible changes to policy due to current restrictive conditions. Traders now predict an 82% chance of a rate cut in September, with a total easing of 54 basis points by year’s end. This stock market rally was mainly due to traders unwinding hedges rather than changing their views on interest rates. Attention is now on the upcoming US Non-Farm Payroll report, which could impact interest rate predictions. If the data is strong, the likelihood of a September rate cut might drop to 50/50, which could lead to a hawkish shift that affects short-term markets. On the other hand, weak data could increase expectations for a third rate cut, supporting the stock market instead.

The S&P 500 Response

The S&P 500 bounced back from a key trendline around the 6,365 mark, gaining momentum after Powell’s comments. If it pulls back to this trendline again, buyers may step in, while a breakdown could push sellers to target the 6,200 level. Looking at shorter timeframes, the 1-hour chart shows a break above a descending trendline, encouraging buyers to strengthen their positions before any possible pullback. Important reports this week include US Consumer Confidence, Jobless Claims, and the PCE price index. Powell’s recent statements indicate that the Fed might adjust its approach, which contributed to last Friday’s rally in the S&P 500. Most of this gain was due to traders unwinding hedges as fears of further rate hikes decreased. The CBOE Volatility Index (VIX) even dropped below 14, indicating that protective puts were being closed. Traders are increasingly betting on a rate cut, with the CME FedWatch Tool showing an 82% likelihood of a 25 basis point cut for the September 17th meeting. The market is anticipating a total of 54 basis points in easing by the end of the year, making a second cut in December very likely. This change in expectations is driving current market sentiment strongly.

Anticipated Economic Indicators

Now, our focus shifts to the important US Non-Farm Payrolls report coming next week. Economists predict +170,000 jobs for August, a slight drop from the +185,000 reported for July 2025. A number significantly higher than this could weaken the case for a September cut. On the flip side, a disappointing jobs report could strengthen dovish sentiment and might lead traders to anticipate a third rate cut by the year’s end. In this case, equities would likely continue to receive support. This situation resembles the market shift seen in late 2023, when weaker economic data allowed the Fed to indicate the end of its rate hike cycle. For derivative traders, it is crucial to watch the 6,365 level on the S&P 500, which has shown strong support. Buying short-dated call options or selling puts near this trendline could be a good strategy for more upside if the upcoming data is weak. However, if the market breaks below this level, momentum could shift toward the 6,200 target. Before the NFP report, we also need to consider key data this week, including today’s Consumer Confidence number, which is expected to ease slightly to 101.5. However, the highlight of the week will be Friday’s PCE price index, which is the Fed’s preferred measure of inflation. Remember, the Core PCE for July 2025 was an annualized 2.7%, so any signs of further cooling would be seen as very positive. Create your live VT Markets account and start trading now.

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