The S&P 500 broad
market index added almost 4% to 4100 points this week. Meanwhile, GDP in the
United States demonstrated another negative quarter with a 0.9% contraction in
April-June 2022 following -1.6% for the first quarter of 2022. Technically the
second quarterly contraction of the economy means the economy is in a recession,
but U.S. Administration downgraded it to rather a technical one, and Treasury
Secretary Janet Yellen denied that the economy is in a recession.
On the other hand,
Wall Street suggests that the U.S. economy has entered a recession, as well as
famous Nouriel Roubini, a New York University professor, who warned that
disaster is just around the corner. “I think there are many reasons why we are
going to have a severe recession and a severe debt and financial crisis,”
Roubini said. Mrs. Yellen and Federal Reserve (Fed) chief Jerome Powell
responded by saying that there is no recession right now. However, Powell is
more cautious with his words about economic recession, while Yellen insists
that a recession is not imminent. Moreover, she said characterised the two last
quarters of economic contraction in the U.S. as not signalling a recession, but
as pointing to the economy as being in a transition period of recovery. “We’ve entered a new phase
in our recovery focused on achieving steady, stable growth without sacrificing
the gains of the last 18 months,” she said.
To recognise a
recession, it seems the U.S. Administration needs to see a much broader
contraction that more severely impacts consumption, employment, and household
earnings. “When you look at the economy, job creation is continuing, household
finances remain strong, consumers are spending and businesses are growing,”
Yellen said. The recession, according to the Treasury Secretary is a
“broad-based weakening of our economy” that includes substantial layoffs,
business closures, strains on household finances, and a slowdown in private
sector activity. “That is not what we are seeing right now,” she said. This
could mean that American citizens should lose about $2 trillion that was
granted by the U.S. government during the last two years of the pandemic. This
would also mean that the U.S. economy has to drop by 4-5%, more than during the
2008 Global Financial Crisis, when the U.S. banking system was on the verge of
collapse.
The alternative is
both the U.S. Administration and the Fed admit the recession is already here
meaning no further tightening action by the Fed to contain inflation could be
delivered. This would mean not only the recognition of the recession, but the
inability of the monetary authorities to control surging inflation. The first
scenario suggests that the U.S. would gear global recession, eventually
bringing inflation under control and securing financial dominance globally. The
second scenario would be far more damaging as it would mean the exit of
investors from the U.S. Dollar and other U.S.-related assets as the Fed would
lose control over the economic and financial situation, therefore devaluing the
Greenback significantly.
Thus, the Fed is
likely to continue rising interest rates even by a shocking 100 basis points in
September if needed. If the Fed and the Treasury fail to get prices down before
a broader economic contraction is indisputably in place, or before this
October, the second scenario may come into force. In both scenarios, a large
weakening of the U.S. Dollar may be the case.
The S&P 500 index
continues to move inside an aggressive upside formation with a target at
4150-4250 points. It is likely the index may move further up as no severe
impact on the market this autumn will be seen. So, it is better to wait for the
index to climb further until clear signs of a possible meltdown emerge.
Brent crude prices are
struggling to break through the $107-108 per barrel resistance level. However,
it could happen at any moment as gas prices are reaching sky-high levels in
July. Once this resistance is passed the upside scenario with a primary target
at $135-145 per barrel and extreme secondary targets at $160-170 will become a
reality.
Gold is enjoying a
recovery as the Fed’s recent actions and the recession in the U.S. support
prices of the yellow metal. Gold prices went above $1760 per troy ounce and may
continue to climb towards the $1800-1820 resistance level. However, long
positions are seen too risky to be opened now as gold prices are also expected
to plummet to $1350-1450 by November. It would be better to wait for the prices
to reach $1800 per ounce to consider opening short positions.
EURUSD has remained
within the aggressive upside formation with targets at 1.03500-1.04500. The
pair needs to close this week above 1.01900 to keep up with an aggressive
stance. There are no good entry points so far.
GBPUSD has met its
aggressive upside formation targets at 1.21500-1.22500. Traders should wait for
the pair to close this week to consider further actions.