Dow Jones Closes Lower On Hawkish Fed Comments

On Friday, the Dow Jones Industrial Average closed lower as the week brought many hawkish comments by the Fed about interest rates. A few top Fed officials noted that a September rate hike is definitely on the table. Gold traded lower thanks to hawkish comments made by the Fed. What probably kept the Dow trading near flat levels was some higher investor sentiment, which is a bullish sign for the indice. The Dow Jones closed lower by 0.24% to 18,552.57. The S&P 500 fell by 0.14% to 2,183.87 and the Nasdaq fell by 0.03% to 5,238.38.

Fed Comments Shine

The main reason for the Dow Jones closing lower on Friday, was the fact that a lot of top Fed officials announced that a September rate hike was still on the table. On Thursday, Fed President John Williams noted support for a September ratehike. He believes that with an indication of a strong domestic economy, that a rate hike should be back on the table. Other hawkish comments for a rate hike, came from other officials earlier in the week. Such officials were Fed Presidents Dennis Lockhart, and William Dudley. They also both indicated that a September rate hike was on the table. These statements overshadowed the skepticism of a rate hike. The expectation from the market was that there would be an 18% chance for a rate hike in September. While December would see a 40% chance for a rate hike being implemented. Why would the Fed giving hawkish comments about raising interest rates cause the Dow to trade lower? That is because there is a correlation between interest rates and stocks. When interest rates are raised it causes the dollar to go up. With the value of the dollar being higher, investors avoid buying stocks. Which is why anytime the Fed mentions hiking interest rates the market gets spooked.

Dollar Trades Higher

The dollar traded higher on Friday, which was one day after the hawkish Fed comment about interest rates was made by Fed President John Williams. It was quite a bump, because the dollar traded higher from an 8-week low against the Euro. The dollar managed to gain 0.30% to 94.46. The EUR/USD pair traded lower by 0.14% to 1.13, marking a stronger dollar. The dollar closing higher most definitely had a negative effect on the Dow Jones. The next step is to see if the greenback can overcome Fed uncertainty. The greenback will be pressured, and may trade lower if the Fed hints to a rate hike in September.

Week Ahead

While most Fed officials implied a possible rate hike in September, such an objective may not be achieved if data fails to impress. This next week will bring a few data points such as new home sales, weekly jobless claims and the GDP report. In addition, all eyes will be on the Jackson Hole meeting. This is where Fed Chair Janet Yellen will be giving a speech on the state of the economy, and may even give a hint about a possible rate hike. The meeting is set to take place on Friday August 26 at around 10:30 a.m. est time.

The Dow futures are pointing to a lower open for the Dow by 6 points. With all eyes focused on the Fed meeting by the end of the week, speculation about a Fed rate hike will shift the Dow Jones around this week. Key technical levels to watch for in the Dow will be if it can trade above the 18,700 level. That level will only be reached if Janet Yellen announces a dovish tone in terms of an interest rate hike. If it can get to that level, then the the long-term trend could eventually head to 21,000. In the short term the Dow must remain over 17,800 where it has support. If that happens then 19,700 will be the first level it must pass, before heading to the long-term target of 21,000.