Weak Labor Data Would Support Markets

Markets are still slightly shocked after the Federal Reserve has change its position towards earlier hike of interest rates and high inflation forecast. Just a month ago the U.S. monetary regulator was not even concerned by galloping prices. And now the Chairman of the Fed Jerome Powell sees inflation might overshoot even Fed’s forecast at 3.4% this year. 

A bit of a twist to the overall picture was added by Fed’s decision to increase the interest rate of reverse Repo, tighten requirements on excessive bank reserves and revised trajectory of interest rates hikes on top of this. 13 of 18 FOMC members are now seeing a possibility of an interest rate hike in 2023 while a month ago there was no suggestion of it. Such alterations came just after two months of rallying inflation. And how the situation might change in a month time when inflation in June jumps to 5.5% or even to 6%? Anyway the process of tightening the monetary policy has now started. The question is only how fast would it be. 

And here we may construct an interesting logic when not the inflation is a prime engine of this process but the labor market. High inflation fact is admitted by the Fed, but the labor market is considered by the monetary regulator as being far from target level of employment. And this is the major reason to wait some more before tapering stimulus measures. 

In this logic, we may consider the healthy is the labor market in the U.S. the faster monetary stimulus measures would be rolled back, and more pain for the market. Alternatively, the worse is the situation in the labor market the slow would be actions from the Fed, and better for the market. 

Luckily, initial jobless claims this week turned to be higher than expected, the first time in the last month. American stock market indices rose a little on this data, and the Greenback stepped down after a heavy rally of the last day. 

However, technical picture suggest quite a positive perspectives for the S&P 500 broad market index with a support at 4200 points and the resistance at 4310 points. So, we may suggest that the index would hardly go down any further this week. 

Crude prices are seen in the upside direction too as Brent crude prices were trying to close the week above $74.30 per barrel, and even more – above $75.40 per barrel in case of the positive sentiment in the market. Such positive development may occur if investors would recall of positive downside dynamics in crude reserves in the United States, where they plunged by more than 7.35 million barrels last week. 

Gold fell into an ideal storm after the Fed has changed its attitude towards inflation and stimulus measures early tapering. Yield on U.S. 10-year Treasuries jumped from 1.49% to 1.58% putting gold prices under heavy pressure. Gold prices plunged from $1860 per troy ounce to $1770 within two days. So, we should better stay away from it for the moment as interest rates in the debt market would continue mounting further pressure on gold prices. 

The volatility in the FX market has dramatically increased after Fed announcements. The U.S. Dollar jumped by almost 2% in one single day. Logically we may expect the Greenback to strengthen further. But we should not exclude strong correction before that. 

The EURUSD has two simple ways to go – to free fall to the support level at 1.16300, or to return to 1.19900 or 1.21100 levels. 

GBPUSD has the same dilemma too, and may move either to 1.38100 or jump to 1.40800. Any trading decisions in this regard should be made only after breaking through of nearest support or resistance levels. 

The USDJPY is trading more comfortably as it is ranging from 109.50 to 110.60 and would hardly leave this range today.