Markets are still slightly shocked after the Federal Reserve has change
its position towards earlier hike of interest rates and high inflation
forecast. Just a month ago the U.S. monetary regulator was not even concerned
by galloping prices. And now the Chairman of the Fed Jerome Powell sees
inflation might overshoot even Fed’s forecast at 3.4% this year.
A bit of a twist to the overall picture was added by Fed’s decision to
increase the interest rate of reverse Repo, tighten requirements on excessive
bank reserves and revised trajectory of interest rates hikes on top of this. 13
of 18 FOMC members are now seeing a possibility of an interest rate hike in
2023 while a month ago there was no suggestion of it. Such alterations came
just after two months of rallying inflation. And how the situation might change
in a month time when inflation in June jumps to 5.5% or even to 6%? Anyway the
process of tightening the monetary policy has now started.
The most intriguing event of this week have already passed and markets
reacted quite positive. The S&P 500 broad market index resumed climbing and
posted new all-time highs, crude prices jumped to two years highs while the
U.S. Dollar remained stable against the basket of other world’s major six
currencies.
The President of the European Central Bank Christine Lagarde made
everything possible for investors to move markets up. After the meeting of ECB
Board Mrs. Lagarde immediately devalued all market fears of high inflation
leaving all stimulus measures unchanged, including the PEPP bond purchase
program. Moreover, she indicated the program might be expanded to compensate
seasonal lack of liquidity.
Concerning inflation Mrs. Lagarde said it is far from readings ECB wants
to have before moving to a normalization of the monetary policy. Her rhetoric
was extremely dovish soothing any possible strong reaction on the super high
May inflation readings in the United States. The CPI index in May rose to 5.0%,
according to U.S. Bureau of Labor Statistics, a highest since August 2008.
Despite such terrifying high inflation readings market are not taking it
seriously so far as investors are looking at the reaction of two major central
banks and Mr. Powell and Mrs. Lagarde are keeping their brains on ice. But, how
long this silent race of the nerves would continue, would Mr. Powell remain unflappable
after the next Fed meeting next Wednesday or could he signal that the Fed might
finally taper its massive monthly $120 billion bond purchase program.
Nevertheless, market would sound positive until then.
The S&P 500 broad market index has not corrected itself to 3160
points as was expected making just one attempt when it slid lower to 4205
points. However, this dip was quickly bought returning the index above 4220
points. With such strong support we could not expect any correction to happen
this week. Moreover, we should be prepared for new record highs next week
before the scheduled Fed meeting.
Crude
prices were more volatile with Brent crude hitting two year highs at $72.80 per
barrel thanks to the unexpected strong contraction of crude reserves by 5.24
million barrels in the United States. OPEC positive outlook for crude demand in
the second half of 2021 also supported prices. A short downward spike at the
end of Thursday might be a signal of possible slowing down of crude prices
rally.
Gold has performed no significant price movements this week finishing it
in a narrow trading range of $1890-1900 per troy ounce. It is possible that
gold prices would continue in this manner before Fed meeting next week.
The
Greenback missed its chances to strengthen. The EURUSD remained near 1.21850 level.
It would be irrational to expect the pair to reach the support at 1.20500
before next Wednesday. So, sideways movements would be a likely scenario.
GBPUSD
is trading with minimal volatility around 1.41200. However, the pair has some
upside potential to 1.42300. If this level would be reached, some small short
positions with a target at 1.41200 may be opened.
The
USDJPY is the only pair that performed high volatility this week. However, it
was waning by the end of the week. The lateral movement within 109.00-109.80
range would likely remain the only scenario for the Yen for the rest of the day.