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S&P 500 closes higher for fourth straight day, but storm clouds remain

New York Stock Exchange, Wall st, New York, USA

Wall Street's relief rally continues, but are investors becoming overly optimistic ahead of the latest inflation rate?

Investors remain optimistic that the worst could be over.

Shares have continued their impressive run during Monday's trading period as a weakening US dollar and a slight reduction in oil prices have investors thinking inflation may have peaked.

The S&P 500 is up 1.06% and closed at 4,110.41 while the tech-heavy Nasdaq composite rose by 1.27%.

Wall Street's strong rebound extended to European markets, including England's FTSE 100 trading up 1.66%.

Australia's market is now predicted to be above 7,000 points during the morning's trading.

Things are bad, but could be worse

Despite the recent rally, the US Federal Reserve is still predicted to lift rates.

It has even gone as far as saying it'll fight inflation at the expense of economic growth.

This is because the inflation rate is at a 40-year high.

At the same time, the war in Ukraine goes on and puts pressure on commodity prices, including oil and wheat.

But while both are bad, things could be worse.

"The combination of the somewhat surprising successes in Ukraine and the possibility of a very favourable inflation headline that maybe even shows a decline for last month may put us into a situation where we have a continued rally here," Toews Asset Management CEO Phillip Toews told CNBC.

"And at that point, the main threat in the short term and in the medium term will be whether earnings continue to deteriorate."

What's next?

Once again the market will be on Fed watch.

The market largely expects another 75-basis-point rise in September as the Fed fights inflation.

But watch for the language used.

Investors will be looking for signs that the worst of inflation is over.

Positive commentary could see the relief rally continue while negative signs will likely see another market pull-back.

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