Weekly Focus: The Fed May Go above 1.5%

May’s inflation figures in the United States of 8.6% year-on-year trampled any hopes for a summer stock market rebound. At 8.6% the Consumer price index (CPI) has a vast distance from the 8.3% recoded in April as the index did not include much of crude prices which surged by 11% and June crude prices which were up by 6% with a possible upside to $170-180 per barrel in June and July.

This upside may mean that prices could rise by 9.0% year-on-year in June, and 10-11% in July. It is hard to imagine that the Federal Reserve (Fed) will keep its interest rates at 2.0% in June and July with such CPI results. It is more likely that the Fed will have no other choice but to increase interest rates by 75 bps in June to 1.75% and by 125-150 bps to 3.0-3.75% in July. This is a nightmare scenario for the stock market and commodities too. Goldman Sachs and JPMorgan upgraded their forecast for the Fed interest rate hikes by 75 bps in June and another 75 bps in July.

Such expectations may erase any hopes for a summer recovery as the S&P 500 broad market index spiralled within an aggressive downside pattern with the primary target at 3650-3670 points, and additional aggressive downside targets at 3450-3550 points.

So, what would be the reaction of the Fed when prices lift-off in June and July and how will the market react? In such a situation any long operations on the S&P 500 index are likely to be put aside not only for this summer but for the whole of 2022. It would be wise to seek for short position opportunities, although now there are none seen in the market.

Brent crude prices continue to climb above the second resistance at $124.0 per barrel. Once the market  is detached from it, prices may rise further up to the third resistance level at $135.0-137.0 per Bent barrel. This is the final resistance level before extreme targets at $160.0-180.0. These extreme levels could be reached by the end of June or in early July.

Gold prices are looking for the downside until the end of July. Prices rose to $1879 per troy ounce, a perfect opportunity to open short positions, then they scaled back to $1820 per ounce. The first targets of this movement are located at $1730-1750 per ounce.

The Greenback has strengthened dramatically as the EURUSD dropped to meet its downside targets at 1.03000-1.04000. The pressure of the strong Dollar is likely to continue this week, but the pair is unlikely to slide below 1.04000.

GBPUSD is much more vulnerable this week after it crushed to the 1.21000-1.22000 area with a possible slide to 1.19000-1.20000. This week the Bank of England (BoE) may take another interest rate decision to tame inflation, while the Fed’s highly likely interest rate hike would certainly put extra pressure on the Pound. So, this week it is better to avoid short positions, while long positions would be in sight after the Fed meeting this week.