Weekly Summary: Investors Hope for Lower U.S. Inflation

This week is probably going to be end in disappointment for the stock market. The S&P 500 broad market index is highly likely to close on the downside, making it the tenth negative week out of the last eleven weeks. The index was losing 2.2% by Friday. It may rebound somewhat during the last trading day of the week but this could hardly help it to land in positive territory for the entire week.

There are a lot of reasons behind the deteriorating sentiment this week as U.S. Treasury Secretary Janet Yellen said the United States is likely to avoid a recession, while the European Central Bank’s(ECB) President Christine Lagarde wowed the investment community by saying the ECB would hike interest rates in July for the  first time in the 11 years.

One may say that Mrs. Yellen’s opinion is justified as she is trying to support markets. But she seems to be ignoring alarming signs of deterioration in the U.S. economy from the fiscal policymakers. This opinion may prompt the Federal Reserve (Fed) to rest in the complacent hope that everything will work out by itself somehow. The same could be applied for Mrs. Lagarde. However, the ECB has less time to deliver a full interest rate hike cycle before markets dive into a possible turmoil in August or September. The ECB may rise deposit interest rates from -0.5% to -0.25% or even to zero without ending its bond-buying programme. But both the Fed and the ECB must react when markets spiral down and stop monetary tightening or even  reverse back to their stimulus policies.

Investors still hope lower inflation in the U.S. would support markets. But could be such hopes justified? The  May Consumer Price Index (CPI) consensus is 8.3%, the same as in April. But does this really matter now as energy prices soared in May and June so far? This would mean another inflation spike in the U.S. in June and July. In such a situation any hopes for a rebound are seen to be pointless.

Brent crude prices crossed the second resistance level at $124 per barrel, opening the path for prices to jump to $135. The chances for crude prices to lift off towards $160-180 per barrel are rising.

Gold prices are in the downside mode until the end of July. This week prices edged up to $1860 per troy ounce, but quickly scaled back to $1840 per ounce. Once the $1820 support level is broken, the next targets are seen to be at $1730-1750. Thus, short positions on gold should be kept.

EURUSD is within an aggressive upside pattern with the targets at 1.07500-1.08500 which have already been reached. The pair rolled back to 1.06000 and may rebound in the short term. However, there are no good entry points so far, as the pair may continue to slide down next week.

GBPUSD is more interesting for trades after successful short positions that were opened at the strong resistance at 1.25900-1.26200 and closed at 1.24800. The support level for the pair could move to 1.23800-1.24000 and this could be used as a target in case of good volatility if the pair reaches 1.25200-1.25500.