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  • Weekly Focus: Inflation in the U.S., Fed, ECB and BoJ Meetings

Weekly Focus: Inflation in the U.S., Fed, ECB and BoJ Meetings

Financial markets are seen to be rallying at the beginning of this week even though important events are still ahead. The S&P 500 broad market index rose 1.3% to 4360 points, reaching highs of April 2022. The U.S. Dollar lost 0.6% and copper prices are up by 1.2%, indicating economic recovery. Crude prices only lost 3.1% to reach $73.20 per barrel of Brent crude.

Investors should be extremely cautious right now as any conclusions might be premature. The U.S. debt market is signaling  that risky assets may have a chance for a further rally as Treasuries’ yields are going down. However, May U.S. inflation data and central bank meetings may dramatically change the situation.

Inflation consensus is very optimistic as the Consumer Price Index (CPI) is expected to slow down to 4.1% YoY from 4.9% in April, while Core CPI is thought to decline to 5.3% YoY compared to 5.5% in the previous month. Such expectations, along with massive borrowings perspectives by the U.S. Ministry of Finance, gave investors a weird understanding of future of the Federal Reserve’s (Fed) monetary policy perspectives in the coming months. The majority of investors – 5.50% -  believe the Fed’s interest rates will remain unchanged in June at 5.25%. Investors also believe that the next hike will take place  in July and it will be taken to 5.50%. If July does bring a hike, it is predicted to be the last one of the year. This is very uncommon behaviour for the Fed, as it usually has no breaks during its hawkish cycle. It would be much easier for the monetary watchdog to lift the rates to the target of 5.50% instead, and see what the market reaction would be.

Any higher-than-expected inflation data would add to market uncertainty. If the Fed does keep interest rates stable while faced with higher inflation numbers, it would likely mean that its hawkish cycle is over, as the U.S. Administration needs to borrow a lot at lower rates. If inflation did slowdown in May this may also signal to the end of the Fed’s hawkish signal. Both options are very risky for the Fed, as any rise of inflation later this year would be shocking. The best option now is to have May headline inflation at 4.1% YoY and Core CPI at 5.3% YoY so that a pause in the interest rate hike cycle in June can be taken and to leave the option open for a move in July. This scenario has already been priced in by investors. Thus, any correction of stocks and U.S. Dollar recovery should be considered appropriate.

The European Central Bank (ECB) is expected to raise its interest rates by 0.25 percentage points this week with a possible pause in monetary tightening for the rest of the year. This would lead to a weaker Euro. The Bank of Japan (BoJ) may surprise markets after its meeting this week, as it really needs to reconsider its loose monetary policy.

Technically, the S&P 500 index continues to have an upside formation with targets at 4250-4350 points, that have already been met. The upside potential is not seen, unless something extraordinary would happen to launch an extreme upside scenario with targets at 4550-4650 points, which is very unlikely. The nearest downside targets are at 4250-4270 points.

Brent crude prices are nearing the support at $67-69 per barrel, as they hit the bottom at the $71.60 level. Once the support is broken, recession scenario chances will become very high. Its targets are at $40-60 per barrel of Brent crude. This situation could be seen as the weakness of the market, but may also prompt members of the Organisation of Petroleum Exporting Countries and its allies (OPEC+) to make more aggressive moves to push crude prices up.

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. Short positions were opened after prices tested the $1970-1980 former support level with targets at $1880-1900 per ounce.

The Greenback has increased its scaled back before the Fed meeting. The U.S. Dollar is seen oversold, but a long trade is also not the best solution at the moment. Another upside move by the U.S. Dollar should be detected to seek out sell opportunities for the Greenback.