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Weekly Focus: Powell’s Testimony, Inflation and Earnings Reporting Season

Most of the large institutional investors are returning to the market this week after long holidays and after last week’s extraordinary volatility. Despite high volatility initiated by Non-Farm Payrolls data for December 2022, no major changes were seen in the market in terms of stock indices. However, the upside move of the indexes may reflect investors’ hopes for softer interest rate hikes by the Federal Reserve (Fed).

This seems to be a futile discussion as in December the Fed already revealed the criteria it will use to track the economy and  its intentions for monetary policy developments. Slowing down average wages and a tense labour market in the United States, together with lower inflation expectations, have suddenly led to an unprecedented low unemployment rate of 3.5% vs 3.6% in November. It is not yet clear why December was such a unique month, as high employment should have led to rising wages and inflation as elevated business activity over the Christmas period forced firms to attract new employees. So, investors should wait for Q4 2022 inflation and GDP data in the United States to get a clear picture of the labour market.

Taking all this into consideration the most adequate suggestion considering the recent market developments would be an exit strategy setup for large investors. So, a sudden upside spike of the stock indexes above the resistance at 3890 points may be considered as rather false and temporary. There are numerous downside signals for the S&P 500 index and current “optimism” could be a classic trap for retail investors who may consider the current situation as a good buy opportunity. Such a bullish trap usually emerges before a large slump in the stock market.

A speech from Fed’s Chief Jerome Powell and the release of inflation data this week may become a turning point for the markets. Powell is thought to reaffirm the Fed’s tightening stance for 2023 and is likely to do so amid a strong labour market and still high inflation. Nevertheless, this will become clear by the end of the week when all signals are received, and the first Q4 2022 corporate earnings report is released by the banking sector. There are no comforting forecasts for these reports.

Technically the S&P 500 broad market index is moving inside a negative formation with primary targets met at 3650-3750 points. The nearest resistance is located at 3930-3940 points, and the support is at 3840-3860 points. It is likely the index will remain in this range this week.

Nothing new has been seen in the oil market so far. The Russian ban of oil exports to “unfriendly countries” that support the oil price cap set by the European Union will be put into force in February. Recession fears have calmed down somewhat. Prices for Brent crude also retreated to $78-80 per barrel. Brent crude prices over $78-80 per barrel are seen to be a temporary departure that could end a new selloff wave to the nearest support at $68-70 per barrel. The lowest targets are currently seen at $60-70 per barrel.

Gold prices are surprising as they continue to rally without any breaks. If prices roll back to $1700-1720 per troy ounce, a sustainable upward movement will be resumed. Prices have reached the resistance level at $1880-1900 per ounce and further direction is highly uncertain at the moment. A stretched rally over the last couple of weeks in gold prices may signal either further upside or a reversal on high volatility with equal chances.

The money market has been divided. It continues to experience elevated volatility that prevents the use of short-term signals. So, it is better to place orders that are attached to longer perspectives. But now the U.S. Dollar is seen to be weaker against some currencies and stronger towards others like the Euro. Whether or not we will see the Dollar moving in different directions against a basket of other currencies remains to be seen in January. Nonetheless, short trades for EURUSD opened at 1.06700-1.07200 with a downside target at 5000 points below the opening level and the same 5000 points for a stop-loss order should be considered very attractive this January.