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  • Weekly Focus: Powell Needs to be Very Dovish at Jackson Hole

Weekly Focus: Powell Needs to be Very Dovish at Jackson Hole

China’s Central bank disappointed investors as it lowered one-year loan prime rate to 3.45% from 3.55%, and left 5-year lending rate unchanged. The latter is used primarily for a support of the troubled real estate sector in China.

Investors hope that some other measures are being prepared to revive this sector, as some property giants like Country Garden are struggling to service their debts amid slow economic recovery in the country. Another default of the large developer may pose a potential serious threat to the financial system of China after a $300 billion default of Evergrande developer in 2021.

Stock indexes rebounded on the news with the S&P 500 broad market index added by 0.5% to 4390 points. But the decision of the China’s central bank also pushed debt yields higher. The U.S. 10-year Treasuries yields rose above 4.30%. And this is where the major suspense of the week is hiding. Debt yields in the United States, the Eurozone and in the United Kingdom are very close to their multi-year highs. If they would breakthrough them it may cast a banking sector into a structural crisis. Thus, central bankers have to be very careful, and likely to sound very dovish on the public. This is largely related to the Federal Reserve’s (Fed) Chair Jerome Powell and the European Central Bank’s (ECB) President Christine Lagarde, who will be speaking at Jackson Hole symposium this Friday. The European economy is very weak and doesn’t generate internal inflation risks. The situation in the U.S. is very different as domestic economy is seen overheated. Atlanta Fed predicts the GDP to top 5.8% in the Q3 2023. Mr. Powell has to send some dovish signals to calm down investors. He may indicate an end of the hawkish monetary cycle in the U.S. with interest rates peaking at 5.25-5.50% for a long period. This could be enough for the debt market to ease with the Dollar to stop strengthening, and for stocks to return on the upside track.

Outside the main intrigue, investors will be looking for PMI’s, or business activity indicators, in developed nations that will be released on Wednesday. NVidia Q2 2023 earnings report this week may provide a guideline for tech stocks. The battle for Yuan and China’s Central bank actions would be very interesting to monitor too. We may expect intervention in the market to be continued.

Technically, the S&P 500 index continues to have a downside formation with the primary target at 4200-4300 points and extreme secondary targets at 3800-3900 points. The downside signal has been finally shaped with a short trade initiated at 4520 points. It would be better to close a part of the trade once the primary target would be reached.

Brent crude prices are again testing the resistance at $86.00-88.00 per barrel after a plunge to $83.10 last week. If prices would fail to pass up the resistance they will likely dive towards $74.00-76.00 per barrel. If prices would fell below $74 per barrel a recession scenario with targets at $64-66 per barrel of Brent crude will be initiated. 

Gold prices are moving inside the mid-term upside formation with targets at $2000-2100 per troy ounce that have already been met. But, the situation has changed dramatically as the important support level of $1980-2000 per ounce was smashed. The nearest support is set at $1890-1910 per ounce. It is unlikely that prices will dive strongly below it this week. In the emergency case of a breakthrough, short positions could be opened after prices retest $1890 per ounce level.

The Greenback is trying to perform a correction, still looking solid compared to its major peers. A sharp correction of the American currency could be expected in August. Further efforts of China’s Central bank to support Yuan may facilitate this correction. If such a correction would emerge, good buy opportunities for the Dollar should appear. But before then, a risky long trade with a small amount is seen for GBPUSD from 1.27200-1.27400 with a target at 1.29400-1.29600, and a stop-loss at 1.26000. A long trade in the AUDUSD from 0.63800-0.64000 with a target at 0.66500 and the stop-loss at 0.63200 is also interesting.

If these trades will be successful, a further weakening of the Greenback could be expected. It would be better to wait for a decline of the EURUSD below 1.05000 to seek out sell opportunities for the Greenback in this regard.