Weekly Summary: A Hawkish Bite at the Capitol

Lael Brainard, a dedicated dovish member of the Federal Reserve’s (Fed) Federal Open Market Committee, has suddenly turned hawkish before the Senate Banking Committee while it was reviewing her in consideration as a nominee for a second term as vice chair of the Fed.

During her testimony Mrs. Brainard said the Fed will use all necessary instruments to lower inflation to the target of 2%. “Our monetary policy is focused on getting inflation back down to 2 percent while sustaining a recovery that includes everyone. This is our most important task,” she said. It looked like she had received a monetary hawkish bite at the Capitol as everybody does there. So, the last stimulus advocate within the FOMC has finally been empoisoned by the “too high inflation” virus.

Investors were enjoying a full complacency after Fed Chairman Jerome Powell’s testimony earlier this week but were alarmed by Mrs. Brainard’s rhetoric. Meanwhile, the U.S. stock market was alerted at the end of the week as the S&P 5000 broad market index lost all of its earlier gains by Friday. The index fell below the key resistance level at 4680 points.

All incoming macroeconomic data plus statements by Fed members indicate that Fed stimulus measures will be over by this March, while interest rates will see their first hike also  in March. Moreover, the Fed’s massive balance sheet of $8.8 trillion will start shrinking in July 2022.

The technical picture suggests the stock market may reverse to the downside as the S&P 500 index is below the key resistance level of 4680 points, which means a further slide to 4580-4600 points.

Brent crude prices have suddenly broken through an important resistance level at $83 per barrel. Now it looks like prices may pave a foothold for the next jump. But in order to do so, Brent crude prices have to cross the important threshold at $85 per barrel. And it seems crude prices could succeed in this. However, the rally to $88-90 per barrel may seem uncertain amid possible global economy slowdown.

Gold prices are seen to be weak, at least until the end of January. By that time any buy positions with a target at $1840 per ounce should be considered with extra caution. The recent spike in U.S. 10-year Treasury yields suggest gold prices may plummet any time soon towards $1800 per ounce.

EURUSD has reached the 1.14800 landmark with the important resistance level at 1.15200-1.15300. If the pair goes above this level, we may expect a strong rally to 1.16500-1.75000. In this regard any open buy trades should be put on hold.

GBPUSD surpassed its primary target at 1.37000. Any buy orders should be closed now, while better sell positions could be opened at 1.37900-1.38100. Such operations should be considered short-term with a rebound to 1.37000 as a maximum downside target.