Weekly Focus: The Fed May Become More Hawkish

The S&P 500 broad market index futures have fallen by 0.1% to 5337 points this week. This appears to be more of a consolidation ahead of significant events this week. The benchmark recently reached a new all-time high of 5375, but retreated following a mixed U.S. labour market report for May.

Nonfarm Payrolls surged to 272,000 compared to the expected 182,000 and 175,000 in April. The unemployment rate rose to 4.0% from 3.9%, while hourly earnings increased by 0.4% month-on-month, surpassing the consensus of 0.3%. Thus, this report suggests an overheated American economy with a twist.

Yields on U.S. 10-year Treasuries rallied to 4.46% from 4.28%, while expectations for interest rate cuts by the Fed in September dropped to 49.0%, according to the CME FedWatch Tool. The optimism of last week has completely faded. The SPDR S&P 500 ETF Trust (SPY) reported fund outflows of $3.6 billion by the start of Friday, which extended to $6.1 billion by the end of the same day.

The two major questions of the week are: what will be the U.S. inflation rate for May, and how will the Federal Reserve (Fed) react to the incoming data. The regulator will meet on the 11th and 12th of June and is expected to release dot plot projections.

Wall Street expects the Consumer Price Index (CPI) to stabilise at 3.3% year-on-year and drop to 0.1% month-on-month in May. The core CPI, excluding volatile food and energy prices, is forecast to decline to 3.5% year-on-year from 3.6%, while the monthly reading is expected to remain at 0.3%. This is a marginal slowdown. If the actual data meets the consensus, the Fed is likely to adopt a neutral stance at its meeting. The chances of further upward movements for the S&P 500 index will remain, although the timing will be stretched. Any lower inflation readings could push the index above 5360-5380 points. Investors may resume purchases, and extreme upside targets could become more plausible. In a pessimistic scenario, if inflation remains stubborn, the Fed may adopt a more hawkish stance.

From a technical perspective, the outlook for the S&P 500 index is mixed. The index has met its primary targets at 5250-5350 points and is now attempting to break through towards the extreme targets of 5650-5750 points, although these levels seem unrealistic in the near term. A rise above 5380 points would indicate this scenario starting to materialise. Immediate resistance is at 5360-5380 points, with support at 5260-5280 points.

Oil prices have slightly recovered to $79.70 per barrel of Brent crude. OPEC+ plans to increase oil production in October, which has limited the upside opportunities for oil prices. The support at $80.00-82.00 per barrel of Brent crude is currently being retested. If prices fail to rise above this level, they may slip towards $70.00 per barrel.

Gold prices, after reaching mid-term targets of $2000-2100 per troy ounce, are now eyeing extreme targets of $2400-2500. There is limited room for further increases, and a pullback could soon occur. For a downside scenario with a target of $2200 per ounce to materialise, the support at $2290-2310 must be breached. Immediate resistance is at $2390-2410.

The U.S. Dollar has breached the crucial support at 1.08000-1.08200 for the EURUSD. The European Union parliamentary elections last weekend disappointed investors. The EURUSD fell to 1.07390. A pessimistic scenario involving U.S. CPI and the Fed meeting could see the pair drop to 1.05000 in the mid-term.