Suspense in the market is intensifying after the recent labour market report published on Friday showed no news about the cooling down of the American economy that could be converted into expectations of an upcoming U-turn in the monetary policy of the Federal Reserve (Fed), and a possible rally of risky assets.
Quite the opposite as the unemployment level suddenly dropped to 3.5% in March from 3.6% in February. Non-Farm Payrolls numbers at 236,000 were almost in line with the forecast of 239,000. Such a strong labour market report increases the chances of another hike of the interest rate by the Fed in May. Investors are now betting a 66% chance of an increase against a 50% chance before the report.
The next milestone on this monetary path is set for Wednesday, when the Consumer Price Index (CPI) for March, together with the Federal Open Market Committee (FOMC) Minutes will be released. Headline inflation is expected to slow down to 5.2% year-on-year in March from 6.0% in the previous month, while Core inflation is expected to edge higher to 5.6% from 5.5% in February. This divergence reflects the difference as the strong labour market and rising wages continue to push inflation up, while headline inflation was decreasing as energy prices were going down. This also indicates that the stubborn high inflation cannot be brought under control without a spike in unemployment.
Energy prices may resume climbing in the second half of 2023 without a deflationary shock, and the stubborn Core inflation will form a cornerstone for another wave of inflation. This is likely to not be allowed as the U.S. banking system may not survive another drop in the debt market. If this happens, we may expect a new financial crisis that will be much more severe than in 2008-2009. In this light the Q1 2023 banking sector reporting season will be extremely important as it will highlight the impact of the banking crisis that broke out in February-March 2023. Banks may furnish their reports iin a rather positive light, but they will not be able to entirely erase these strains.
Technically, the S&P 500 index has an upside formation with targets at 4150-4250 points. The index reached the lower margin of this range last week, which is enough to consider that the upside targets have been met. We may witness another upside wave in the first half of this week followed by a highly likely correction towards 4020-4040 points.
Oil market traders have all eyes on the resistance of $86 per barrel of Brent crude. If this resistance level is crossed, the rise of crude prices to $94-96 per barrel will be the primary scenario. If this is the case, the downside trend will be eliminated. If the resistance survives, the recession scenario will become the leading factor dragging down prices to $40-60 per barrel of the Brent crude benchmark.
Gold prices are moving inside the mid-term, upside formation with targets at $2000-2100 per troy ounce by the middle of 2023. Prices may perform another attempt to reach $2080-2100 per ounce. In case of a bounce prices are likely to return to $1890-1900. Otherwise, they will go up. However, prices are likely to tumble before they can resume climbing towards extreme targets at $2400-2500 per ounce.
The U.S. Dollar is expected to be supported in April by the emerging upside signals. 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 continued until the targets of 1.03000-1.03500 are met.
Besides, short positions for AUDUSD from 0.66900-0.67400 with the target of 3500 points and the same stop-loss order could be considered interesting. Short positions for GBPUSD from 1.23300-1.23800 with the target of 5000 points and the same 5000 points for a stop-loss order could be considered. Rising risks and market volatility could prompt trade volumes to be reduced.