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  • Weekly Focus: Debt Ceiling Talks Crunch, FOMC Minutes, and Core Inflation

Weekly Focus: Debt Ceiling Talks Crunch, FOMC Minutes, and Core Inflation

The unexpected debt ceiling talks crunch that started last Friday continue this week. For no apparent reasons both Democrats and Republicans accused each other of violating initial bargaining points towards unacceptable levels. Exactly how this is possible remains unknown.

Although, this could have been the original plan, while both sides were playing a game of giveaway just to win some more time to get their hands on a real bargain,  U.S. President Joe Biden and the House speaker Kevin McCarthy have to step in another meeting that is scheduled for Monday. This is a very risky political move as markets are becoming extremely nervous.

Goldman Sachs’s analysts have calculated that the new deadline “X-date” of the U.S. technical default could be on June 8-9, and not June 1, as U.S. Finance minister Janet Yellen previously indicated. So, investors may still have some time left before they start to panic. Both Democrats and Republicans may be aware of the fact that they have some more time to play a chicken game. This is a very risky scenario, as both sides could use this extra time to add more drama in the markets. Thus, investors continued to dump short-term Treasuries, as their yield surged. Meanwhile, long term U.S. debt yields are going down. This may indicate that investors now see recession chances increasing as debt talks are in stalemate. The recent Bloomberg pools deliver a 65% chance of a recession hitting the American economy in 2024. Investors do not believe in a technical default scenario for the United States, while considering elevated volatility in short-term debt. That could mean that they believe the Federal Reserve (Fed) will lower interest rates in case of any economic troubles. Thus, the U.S. long-term debt provide a very promising opportunity to open long trades now, while short-term debt trades are better to be delayed after the debt ceiling talks are over.

In such environments the prices of commodities should continue to slide, while the Greenback should strengthen, and the S&P 500 broad market index could rest at the current levels. The results of Biden-McCarthy debt ceiling talks could change this environment very quickly, but these considerations are the only ones investors have at the moment. The debt market is very sluggish and therefore is not expected to deliver immediate answers. So, even the FOMC Minutes and PCE Price Index are unlikely to change this sentiment.

Technically, the S&P 500 index has an upside formation with targets at 4500-4600 points. The index is moving towards the resistance at 4250-4270 points. If the resistance is crossed, traders may receive an open path to the primary upside target at 4500-4600 points. The nearest support is at 4120-4140 points. A breakthrough of the support will signal a very likely U-turn to the downside.

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 resistance at $77.00-79.00 per barrel and are moving down to the range of $67.00-69.00 level per barrel. Once they breakthrough this level they may accelerate further down. However, this will largely depend on 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. But the situation has changed dramatically as the important support level of $1980-2000 per ounce was smashed this week and bullion prices dropped to $1965-1970. This could mean that the price spike to $1962 per ounce displayed the ultimate effort to test the resistance at $2070-2090 per ounce. The retest of the $1970-1980 former support level is currently underway. So, any short positions with a downside target at $1880-1890 per ounce have a go signal.

The Greenback is slightly retreating amid the sudden slap from the debt ceiling talks. If the debt talks resume in a timely and constructive manner, the U.S. Dollar is likely to resume its rally against other currencies. So, EURUSD short trades will be intact for some more time. Thus, short trades for EURUSD opened at 1.06700-1.07200 should be closed at the 1.06000-1.06500 area.