Stocks, stuck in their own zigzag pattern, remain vulnerable to the whims of unusually volatile currencies in the week ahead.
As financial markets adjust to the Fed's latest guidance on rates, traders will be hyper-focused on any potential clues in economic data or central bank speak that would help clarify timing of its first hikes. Stocks surged in the past week for the first weekly gain in a month, and it was no coincidence the dollar saw its first decline in five weeks.
The dollar index lost more than 2.5 percent but only after an extraordinary amount of intraday volatility. Treasury yields moved lower, also transitioning to a new Fed forecast.
"The dollar has acted like an anvil on stocks," said Wunderlich Securities' chief market strategist, Art Hogan. "We need a few days where we're not measuring the dollar's moves in percentage points." Currency strategists expect the greenback to resume its uptrend but say the Fed may have triggered a short-term correction.
There are more than a half-dozen Fed speeches in the coming week, but two are key. Fed Vice Chairman Stanley Fischer speaks Monday and takes questions at the Economic Club of New York, an important forum, and Fed Chair Janet Yellen ends the week with a speech on policy in San Francisco on Friday afternoon.
Markets interpreted the Fed's latest statement and economic forecasts to mean it is on a slower path of rate increases, more in line in some ways with market expectations. But what has become more of a question is when the central bank will begin to hike, and the market has moved considerably closer toward expecting the rate rise at the Fed's September meeting, rather than in June.
"It makes the employment report, the wage data and some of the inflation readings more important," said Rick Rieder, co-head of BlackRock Americas fixed income. "It will increase the focus on those readings in the next couple of months. They have to have significant continued improvement for it to be in June."
Therefore, the consumer price index Tuesday will be one of the most important economic reports in the week ahead. For the first time in five months, it is expected to be positive, but barely. The Fed, in its efforts to begin normalizing rates, has been frustrated by stubbornly low inflation readings.
"I think that number is going to disappoint. My gut is that it might come in negative again," said Dan Greenhaus, chief global strategist at BTIG. Greenhaus said he is also focused on Wednesday's durable goods, particularly the business spending-related numbers in that data. He is watching shipments of nondefense capital goods, ex aircraft, and expects durables to be up just fractionally.
But it could be the dollar that drives stocks. The Dow in the past week surged 2.1 percent to 18,127, while the S&P 500 rallied 2.7 percent to 2,107, just 12 points away from its all-time high. The Nasdaq broke back above 5,000 and finished the week at a new 15-year high of 5,026, very close to its all-time closing high.
Stocks were extremely volatile before and after the Fed announcements Wednesday, with the Dow trading in a 500-point range from high to low, but traveling more than 1,500 points up and down in a week. Oil, also volatile, got a boost from the dollar, after setting new six-week lows. West Texas Intermediate futures for April were up 2 percent for the week at more than $45.72 per barrel.
Paul Richards, UBS managing director, said the currency markets are sensitive to two key issues. One is the question of whether the Fed moves in June, and the other is whether there is progress in Greece's discussions on reforms.
The euro got a lift Friday on optimism about Greece, but he said the situation could drag on. The common currency has been a key factor in the dollar's rally, falling in recent weeks as the European Central Bank embarked on a quantitative easing program while the Fed moves toward tightening. ECB easing also drove European sovereign yields lower, which in turn sent buyers into U.S. Treasurys.
"The ball next week is in Greece's hands," Richards said, adding he is cautious about the prospects for a deal. German Chancellor Angela Merkel on Friday said that Greece would receive funds to ease its cash crunch if creditors are able to approve a list of reforms. Greek Prime Minister Alexis Tsipras is expected to provide a list of reforms in coming days, and he is scheduled to meet with Merkel on Monday in Berlin, according to reports.
Richards said if the situation stays tense, and Greece does not strike a deal, it could result in its exit from the euro. The timing of that could coincide with a possible Fed rate hike in June and that would make for turbulent markets. He puts the odds of a Greek exit at 20 percent.
Larry Kantor, head of research at Barclays, expects Greece to reach a deal. "If they don't give in very soon, and sign the reforms and do the deal, they're going to have to put in capital controls," he said. "I think that could be a little bit disruptive in the near term. I don't think it's enough to cause a full-blown crisis in the euro zone."
Greenhaus said the dollar could be a factor on another front. The stock market has responded poorly to the rising greenback because traders fear the strong currency would hurt the profits of multinationals. "How much is it affecting the earnings? That's what everybody is wrestling with," Greenhaus said, noting that more companies are likely to warn that either falling oil prices or a rising dollar have hurt their earnings.
"This is really all a sideshow to when things get going in two to three weeks," he said of earnings season. Greenhaus said the dollar impact is difficult to measure, but Tiffany's earnings were a good example of the kind of hit that might be seen. It said sales were down 1 percent but would have been 3 percent higher if not for currency impact.
Kantor said he continues to look for better gains in overseas markets, particularly Japan and Europe. Japan is up more than 10 percent so far this year, and German stocks are more than 22 percent higher. Meanwhile, the S&P is up 2.4 percent for the year.
"I'm not negative U.S. stocks, I'm just more positive elsewhere," he said. "I think what we're seeing so far this year is appropriate. Stocks are up very little and Europe and Japan are up a lot more. That matches what's going on if you take the dollar, oil and all the central bank easing that's not happening here but everywhere else. So the U.S. is underperforming, but not performing so badly."
Besides the Fed and data, traders are watching Treasury auctions Tuesday through Thursday. The Treasury is auctioning two-year, five-year and seven-year securities.
What to Watch:
4:40 am: Cleveland Fed President Loretta Mester in Paris
10:00 am: Existing home sales
12:20 pm: Fed Vice Chairman Stanley Fischer at The Economic Club of New York
Earnings: HD Supply Holdings, McCormick, Sonic, Steelcase
6:05 am: St. Louis Fed President James Bullard in London
8:30 am: CPI
9:00 am: FHFA
9:45 am: Manufacturing PMI
10:00 am: New home sales
1:00 pm: $26 billion two-year note auction
10:00 pm: San Francisco Fed President John Williams in Australia
Earnings: Paychex, Apollo Education Group, Yingli Green Energy, Red Hat, Five Below, Worthington Industries
6:30 am: Chicago Fed President Charles Evans in London
8:30 am: Durable goods
11:30 am: $13 billion two-year floating-rate notes
1:00 pm: $35 billion five-year note auction
Earnings: ConAgra, Accenture, Lululemon Athletica, Gamestop, Restoration Hardware, Scholastic, Commercial Metals
8:30 am: Initial claims
9:45 am: Services PMI
1:00 pm: $29 billion seven-year note auction
6:30 am: Fed Vice Chairman Fischer speaks in Germany
8:30 am: Real GDP (Q4 third)
10:00 am: Consumer sentiment
10:00 am: Atlanta Fed President Dennis Lockhart in Detroit
3:45 pm: Fed Chair Janet Yellen on monetary policy in San Francisco, Q&A
This article originally appeared in CNBC.