FX.co ★ Tough times ahead for the US stock market. Great prospects for dollar

Volatility was quite low on Monday because some trading floors were still closed due to the Easter holidays. US investors were also noticeably cautious because of the ongoing corporate reporting season, upcoming US data and George Powell's speech on Thursday.

Another reason why the US stock market continues to be under pressure could be the expectations of a more active increase of Fed rates following the May 4 meeting. Most likely, investors are concerned if US companies will be able to withstand a sharp increase in interest rates or not.

But for this week, the focus of markets will be the earnings report of United Airlines, Tesla, Netflix and American Express. Currently, about 7% of companies in the S&P 500 have reported their actual Q1 results, and 77% of them posted better earnings-per-share (EPS) guidance, corresponding to a 5% average result. Looking ahead, the expected earnings growth rate for the S&P 500 was 5.1%. If this momentum continues, it will be the lowest earnings growth rate for the index since Q4 2020.

Obviously, many investors are doubting the ability of US companies to go through a period of rising interest rates without serious losses. If having a 0.25% hike in the key interest rate already dampened profits, what more would a 0.50% increase do? Most likely, it will slow down the efficiency of companies in the second quarter, which will slow economic growth. Worst case scenario is a deep and prolonged recession.

On the bright side, a rise in rates will benefit dollar, which is currently growing, albeit slower than before. The ICE dollar index has already risen above 100 points and does not seem to be going down. USD will also increase amid growth in the yields of treasuries, which are actively sold amid the reduction of Fed bond portfolios.

At the moment, USD/JPY has already risen to the levels that were observed 20 years ago, and it is likely that this is not the limit. Most probably, it will climb to 134.50 and 145.75 soon, which is a signal that the period of "weak dollar" has finally ended.