Weekly Focus: Powell Could Scare Markets

The S&P 500 index has finally changed its upside pattern to the downside after a recent decline to 4585 points. At this point such a change was very unfortunate since a new downside pattern would almost certainly lead to a decline of the index to 4350-4400 points by the middle of next week.

There are many reasons for such a 5-7% decline this week. First, the Federal Reserve’s (Fed) Chairman Jerome Powell will testify on Tuesday before the Banking Committee in the Senate in order to get a clearance for his next term. Mr. Powell has received a carte blanche for the White House to tackle inflation and may easily give a hawkish testimony to secure his position in the Senate. And this could well be the first sign that will begin the stock market’s decline.

Secondly, consumer inflation data in the United States in 2021 may overshoot the forecasted of 7.0%, bringing it to a record high not seen since early 1982. Some indicators indirectly point towards increasing inflationary pressures that may lead to additional monetary tightening measures from the Fed.

Another portion of the producers’ inflation will be released this Thursday. The PPI index is expected to rise to 9.8% year-on-year vs 9.6% y-o-y in November and could also be considered as a reason for the Fed to tighten its actions. On the same day the Senate Banking Committee will also hold a hearing with the Fed’s vice-chair Lael Brainard. Mrs. Brainard might not bring forward a strong hawkish rhetoric, but if she supports Powell in his anti-inflationary efforts this could be enough to convince investors to continue their selloffs in the stock market.

The key support level for the S&P 500 index at this point is 4680 points, and this seems to be sending out a distress signal. So, investors may open sell positions at this point with a first target at 4580-4600, moving stop-loss lower along with anti-inflationary statements made by the Fed’s seniors. There are no alternative scenarios on the table at the moment as an unlikely spike of the S&P 500 index to 4770 points is needed, and that is highly unlikely.

The oil market is standing tall with the technical picture confirming current high price levels. Fundamentally, the current Brent prices which are at $81.00-82.00 per barrel are seen to also be justified amid fears of a possible oil production halt in Kazakhstan as riots continue to terrify southern regions of the country. The resistance level for Brent cure prices is located at $83 per barrel while the support is at $79.50-80.20. However, some trades are possible from these levels.

The gold market is moving to the upside direction. But it is still too early to open trades with a target of $1840 per troy ounce as some downside spikes could appear by the end of January. Moreover, a recent surge in 10-year U.S. Treasuries yields may initiate corrections in gold prices at any time now towards $1750 per ounce.

EURUSD has finally cleared the path to the upside. Buy positions from 1.13100-1.13300 with the target at 1.14300 by the end of next week are looking promising. The Euro may even climb to the 1.15000.1.15200 area as a bonus target. Some small corrections could occur at 1.13900 in the second half of this week, but they should not be used for any sell positions.

GBPUSD has moved on most of its upside path and now only the 1.37000 target is left. So, it is better to avoid opening any buy positions without any correction to the 1.35000.1.35300 area. It is recommended that any buy positions previously opened should be kept open until this final target is reached.