Weekly Focus: Fed to Move and Win

Last month mostly collected all major information tracks for the markets. May will start with the interest rate decisions of the Federal Reserve (Fed) and the European Central Bank (ECB). The U.S. Congress has to decide whether it will lift its debt ceiling by the end of this month. Geopolitical tensions may increase with the start of widely expected Ukrainian counter-offensive against Russian troops, and possible new U.S. sanctions against China’s tech sector.

Thus, a popular expression on Wall Street “sell in May and go away” could be especially vital this year. This wisdom is largely confirmed by statistics as yields in the stock market indeed are tumbling in May and June compared to April. However, investors may decide to continue with the market rally amid sooner-than-expected monetary easing expectations. There is no correct answer to be seen yet. So, the first week of May could be a period of decision making as major central banks will deliver their monetary outlook accompanied by crucial macroeconomic data, including Non-Farm Payrolls on Friday.

Any moves from central banks could be interpreted both as a buy and sell, signal depending on the context. Any interest rate hike decision below the expected 0.25 percentage points could be considered as confirmation of a weak economy and a reason for a sell-off. A decision to raise rates by more than 0.25 percentage points may signal that the economy is doing well according to central banks’ perceptions. This may direct investors to open long trades amid expectations of a nearing interest rates decline.

This is just an example of possible perverse interpretations of incoming factors by investors. Thus, the most appropriate tactic for this week would be to wait and see. This may help traders to avoid speculative traps, and take more rational decision by the end of Thursday or even Friday, when the market reaction on the interest rate decisions will be clear.

Technically, the S&P 500 index has an upside formation with targets at 4500-4600 points. This scenario will become the primary one if the index moves above 4150-4170 points. However, fundamentally it is unlikely to happen.

The recession scenario chances are rising in the oil market as Brent crude prices continue to tumble towards $40-60 per barrel, which is the recession target. Prices are testing the support at $77.00-79.00 per barrel. Once they break through, prices may accelerate towards $67.00-69.00 per barrel. Further moves will largely depend of the efforts of the Organisation of the Petroleum Exporting Countries and its allies, known as OPEC+, to stabilise prices.

Gold prices are moving inside the mid-term upside formation with targets at $2000-2100 per troy ounce that have already been met. However, the tension is mounting as prices continue to hover around the support level at $1980-2000 per ounce. If they pass the $1980 threshold, they may accelerate down towards $1900. If the support survives, prices may lift to $2080-2100 per ounce. So, it is better to wait until the battle over $1980 ends and prices move in either direction. The battle is still in process.

The monetary market situation is getting more complicated. 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 are intact. The decline of the EURUSD to 1.05000-1.05500 was used to close half of the trade. The other half should be closed at 1.05000-1.06000 considering recent developments.

Short positions for AUDUSD from 0.66900-0.67400 with the target of 3500 points and the same stop-loss order and short positions for GBPUSD from 1.23300-1.23800 with a target of 5000 points and the same 5000 points for a stop-loss were closed with a minor profit. No new position for these pairs can be seen amid rising uncertainty and a possible eruption of high volatility.