This week
inflation in the United States reached a new 41-year record, while U.S. banks
posted weak Q2 earnings reports, sounding a sad tune for the entire reporting
season. Bank of Canada and Bank of New Zealand hiked interest rates by 50-100
basis points. Even the Federal Reserve (Fed) is considering a sky-high single
interest rate hike by 100 basis points in July.
A huge
abyss is opening in front of financial markets. No burning torch will light up
a path leading towards the pit, rather markets will just be thrown down to the
dense darkness. Paradoxically, the recession in the United States may strangle
this inflation fire leaving it without oxygen.
But the
confirmation of the recession in the United States in the second quarter will
only come after the Fed’s meeting at the end of July. This would give the
monetary watchdog an opportunity to raise interest rates by the extreme 100
basis points. At least this option will be on the table according to Atlanta
Federal Reserve Bank President Raphael Bostic.
The market
is even more pessimistic giving a 44% chance for such 100 bp hike vs 55% for 75
bp interest rate rise. So, markets may have a spectacular volatility party in
two weeks, and it would be wise to calm down a little before that, or the party
may turn to panic followed by hysteria by July 27 as, by then, the Fed will
decide on further monetary tightening actions.
The best
medicine for the mental health of investors is to switch to the upcoming macro
data that has less importance, like Retails Sales in the U.S. and further Q2
banks reporting. If nothing catastrophic will occur due to this news, the
S&P 500 broad market index will continue to hover around the 3760-3810 area
by the middle of the next week.
The idea of
U.S. President Joe Biden capping prices on Russia’s oil globally is seen to be collapsing.
China and India have minor interest in this as they see such a move as being a
driver to damage their own advantages. Saudi Arabia is unlikely to accept this
idea too. Such expectations are confirmed by the technical formation of Brent
crude prices that is indicating primary upside targets at $135-145 per barrel
and extreme secondary targets at $160-170 per barrel despite the recent
correction to $100.
Gold prices
continue to decline, hitting $1700 per troy ounce and below. The range of
$1720-1740 per ounce is a very strong support and may gravitate prices back.
Nevertheless, the next support level is located at $1630-1650, making short
positions opened at $1860-1880 justified to be held at least until the end of
July.
EURUSD
continues to move within the aggressive downside formation with a reached
primary target at 1.00500-1.01500, and secondary extreme target at the parity
rate. The pair has an additional target at 0.98500-0.99000.
GBPUSD has changed
its downside formation to reach a more aggressive one which is meeting the
target at 1.18500-1.19500. The pair may have a chance of recovery in the second
half of next week.
Generally,
traders are consolidating large short positions against the Greenback. Such a consolidation
may indicate an upcoming recovery for major currencies like the Euro and the
Pound that have an upside potential by 14-15%. It is hard to say when this
consolidation will be completed, but it is worth to keep that in mind. In this
regard, the priority should be given for long positions of EURUSD and GBPUSD.
If there are no immediate signals for such trades it would be better to wait
for such opportunities to emerge.