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  • Weekly Summary: Nervous Weekend Ahead of the Fed’s Meeting and Possible Escalation in the Middle East

Weekly Summary: Nervous Weekend Ahead of the Fed’s Meeting and Possible Escalation in the Middle East

This week is almost over, but investors have rather more questions than answers. What the Federal Reserve (Fed) will do on its meeting next week? What will its Chairman Jerome Powell will say? Would be there an escalation of the Israeli-Palestinian conflict this weekend or next week? When the rally in the U.S. debt market will be over? In addition, finally, how long the decline of stock indexes will last?

Some of the questions may seemingly have simple answers. The Fed is likely to keep its interest rates unchanged. But, the trick is that all these consideration may change dramatically in a blink of an eye if Israel will launch its ground invasion of Gaza strip this weekend, while Iran, from its side will deliver a bold response, including a blockade of the Strait of Ormuz. In this case, the crude prices would open with a gap next Monday that would derail all consideration about Fed’s actions. A scenario with escalation of the Middle East conflict this weekend is unlikely considering various rumors and action from both sides of the conflict. But such a scenario is a bold evidence how rapidly things may change forcing investors to react quickly. 

The U.S. GDP for the Q3 2023 was reported at strong 4.9% QoQ, and this is very far from the recession. But if one compares the Q3 2023 data with the Q4 2022 then the number would rather low. If a seasonal slowdown in the Q1 2024 would be strong the economy will dive into a recession. Investors understand this. The question is when this understanding will be translated into prices. This translation may have been started already. The S&P 500 broad market index lost 1.5% this week and 3.0% since the beginning of October. Stock are likely to extend their drop in early 2024 if U.S. GDP would dive into negative zone.

In this case, the war in the Middle East could be rewarding for the U.S. if crude prices would not surge to $150 per barrel of Brent crude, and the yield of 10-year Treasuries would not jump to 6-7%. Anyway, the U.S. have to keep crude supplies via the Strait of Ormuz intact.

Technically, the S&P 500 index downside formation with a primary target at 4100-4150 points and extreme targets at 3700-3800 points has not changed. The support will move lower to 4150-4170 points next week. A strong resistance is located at 4250-4270 points. Short trade was opened from 4360 points three weeks ago. 

Oil market has become the most important indicator pf the situation in the Middle East. Brent crude prices are forming a narrowing triangle that indicates a rapidly nearing resolving of the current tensions by the end of next week. Brent prices are close to the lower margin of this triangle at $92.00-94.00 per barrel. But this doesn’t necessarily mean that prices are likely to drop to the support at $83.00-85.00 per barrel. The oil market need far more strong news to define a future direction of prices. 

Gold prices are moving inside the mid-term upside formation with targets at $2000-2100 per troy ounce that have already been met. The resistance at $1910-1930 was smashed. Prices are moving towards the $2000 per ounce. There was no sound retest of the $1930 level. Thus, any long trades that were opened are likely to be closed at $2000 per ounce level. This doesn’t mean that prices would not move to $2100 per ounce, but this move would be very risky to follow.

The Greenback advanced slightly this week. It may continue to strengthen ease in case of a further escalation in the Middle East. The Dollar may also edge higher in advance ahead of a dangerous weekend, when Israeli forces may launch ground invasion of Gaza strip. There are almost no good trades at the moment. A short trade with a small amount for GBPUSD from 1.21150 with targets at 1.20500 and 1.19700 are still opened.