Investing.com -- It’s here: the week traders across markets have been waiting for; one that will tell if the Federal Reserve is done with its 16-month adventure of taming inflation with rate hikes and allowing economic forces to do the job after this - a move that could still lead to higher energy prices, complicating matters for the central bank.
Since the Fed skipped a rate increase in June, its first time since March 2022, speculation has been rife that its last hike for this year will be on Wednesday - despite the central bank’s projections showing there could be another before its final policy meeting on Dec. 13.
Weeks ahead of the July 26 rate decision, the reading of Fed tea leaves has been on to discern if the central bank will take last month’s encouraging retreat in U.S. jobs, wages and consumer prices as a sign that it should step aside too.
Economists are already feeling hopeful about the United States dodging a downturn. Inflation cooled in June, while joblessness in the month fell. Those two factors normally have an inverse relationship.
And while labor market growth for the month was the slowest since the coronavirus pandemic ended, employers still created enough jobs to meet the expansion in population - and hiring is still faster than in the pre-outbreak era in 2019.
The European Central Bank signaled earlier this month that it could be ready to pause on rate hikes from September onward. In Canada, meanwhile, inflation dropped to within the control range of the Bank of Canada for the first time since March 2021.
Thus, attention next week will be on not just what the Fed does but also says, given Chairman Jay Powell’s stance at his June news conference that the central bank might be in a position to do two more rate hikes before the year is out.
Falling global bond yields were also prodding investors to move out of Treasuries and into better potential havens like gold as well as true risk assets such as oil and equities, said analysts.
And just as important as the Fed’s actions and thoughts is the dollar, which tumbled to 15-month lows, turbo-charging oil’s 9% rally of the past four weeks, before rebounding just ahead of the Fed meeting.
Watching from the sidelines are oil bulls, eager for any development that could offset the constant downside for crude prices from weak economic numbers out of China, the world’s largest oil importer.
If Powell says or - even remotely suggests - that the Fed is done for this year with hikes, oil could have a better shot at turning $80 a barrel into support rather than resistance.
A definitive end to U.S. rate hikes could also prod gold out of its $1,900 slumber and put it back on the race towards $2,000 an ounce.
But knowing Powell, he will likely say the Fed is heartened at the progress it has made in slowing inflation - which, according to the CPI, grew by just 3% per annum in June versus the 40-year high of 9.1% a year ago. While taking a victory lap, the Fed chair will probably add that he was leaving the door open to another hike should inflation spike again.
And Powell may have good reason for keeping the Fed tool kit on inflation open.
Borrowing costs on loans such as the 30-year fixed-rate mortgage and home equity lines of credit are now the highest in more than two decades, creating affordability challenges and tightening the flow of credit to households, Sarah Foster noted in a blog on Bankrate.com.
“But there have also been some silver linings: Yields at the nation’s top savings accounts are the highest in 15 years,” she added.
The process of unwinding inflation in the more-stubborn services, housing, medical care and insurance categories could take more time, and Fed officials likely aren’t yet satisfied with how high core price increases currently are. Economists say the Fed will likely want to keep its options open.
Inflation could also worsen if officials give the all-clear that they’re done, partially because it could spark a loosening in financial conditions that unwinds some of the necessary tightening in borrowing costs. Oil bulls are already drooling at the prospects of $90 pricing or above for crude if summer demand spikes and the Saudis and other producers in OPEC double down with output cuts.
Almost everyone now is clamoring for the Fed to step aside from the rate hike lever. On Wall Street, the celebratory mood is evident with the end nigh to almost a year and a half of rate hikes. It will be advisable for the central bank to proceed with caution. There will be no applause for the Fed if it gives the all-clear now on rates now and reverses course because of a recession.
Oil: Market Settlements and Activity
OPEC’s bid for $80 and above oil got a boost from ally Russia in the just-ended week as Moscow’s increasingly desperate offensives against Ukraine raised supply concerns in a market already besieged by the oil cartel’s rhetoric over cuts.
Crude prices settled up a fourth straight week of gains as Russia continued to target Ukrainian food export facilities on Friday, seizing ships in the Black Sea and escalating tensions after withdrawing from a U.N.-brokered safe sea corridor agreement.
OPEC, or the Organization of the Petroleum Exporting Countries, meanwhile continued its megaphone policy as Suhail al-Mazrouei, energy minister of the United Arab Emirates, told Reuters in an interview that the oil cartel is "only a phone call away" if more choking of the oil market is needed.
New York-based West Texas Intermediate, or WTI, did a final trade of $76.83 per barrel on Friday after officially settling up $1.42, or 1.9%, at $77.07. For the week, the U.S. crude benchmark was up 2.2%, after gains of 2.1%, 4.6% and 2.1% over three prior weeks.
London-based Brent for September delivery did a final trade of $80.89 after finishing the New York trading session up $1.43, or 1.8%, at $81.07 per barrel. For the week, the global crude benchmark gained 1.5%, after rising 1.8%, 4.8% and 1.4% over three previous weeks.
On a monthly basis, crude has climbed about 9% in July after June’s 4% gain. The run-up comes amid Saudi and Russian rhetoric about production cuts - an additional one million barrels per day each for the kingdom and half a million a day pledged by Moscow - as well receding inflation data that suggested the Federal Reserve will be less aggressive with interest rates going forth.
Notwithstanding those gains, the market has had trouble reaching beyond the OPEC target of $80 and above due to dismal growth data out of China, the world’s largest importer of oil, and spotty demand for gasoline in top oil consumer the United States - despite the advent of summer travel, which usually results in runaway usage of fuels.
Oil: WTI Price Outlook
As WTI makes repeated advances northward, crude bulls finally got to establish their presence above the 2000-Day SMA, or Simple Moving Average, of $76.70 that strengthens their resolve for further bullish advance, said SKCharting.com’s chief trading strategist Sunil Kumar Dixit.
“The 100 day-SMA of $73.50 and the 50-day EMA $72.90 will act as dynamic support zone in the event of a pull back downwards, if bulls hesitate to clear through 50-week EMA $78.40,” Dixit said, referring to the Exponential Moving Average.
“Once this 1st line of resistance is decisively cleared, bulls will be challenged by the 100-week SMA of $85.20, followed by the Monthly Middle Bollinger Band $86.20.”
Gold: Market Settlements and Activity
Gold bulls haven’t done much since sending the yellow metal into an upswing mode on Tuesday for the first time in nearly a week and to 7-week highs after the European and Canadian banks signaled hard-fought wins against inflation.
The front-month August gold contract on New York’s Comex did a final trade of $1,963.90 per ounce on Friday after officially settling the session at $1,966.60, down $4.30 on the day. For the week, the benchmark gold futures contract was barely changed from the previous Friday’s $1,964.40. On Tuesday it reached $1,988.25, a peak Comex gold had not gotten to since cresting at $2,000 in late May.
The spot price of gold, which reflects physical trades in bullion and is more closely followed than futures by some traders, settled at $1,961.96, down $7.55, or 0.4%.
Gold: Spot Price Outlook
The short-term bullish rebound in gold has taken a breather as a $30 correction dragged the metal down to $1,957 from a $1,987 high, closing the week with meager gains, noted Dixit of SKCharting.
Going further, the 50-day EMA of $1,949 would be the next support, followed by a significant confluence of the 4-hour chart formed by the 100 SMA and 200 SMA, both aligned at $1,941.
“Bulls will need to defend momentum at the test of value zone, else, a further correction will make deeper dents into $1,925 and $1,900,” Dixit said.
“If gold finds buyers above the $1,968-$1,978 horizontal resistance zone, a retest and break above the swing high of $1,987 will lead to next leg higher of $1,996 and $2,009 before embarking on $2,035.”
Natural gas: Market Settlements and Activity
Longs in U.S. natural gas futures booked their first weekly gain for July after extraordinarily high power burns for the month from a spike in air-conditioning demand driven by summer heat.
Most-active August gas the New York Mercantile Exchange’s Henry Hub did a final trade of $2.724 on Friday after officially settling the session at $2.7130 per mmBtu, or million metric British thermal units — down 3.75 cents, or 1.4%, on some profit-taking over the previous session, where it gained almost 6%.
For the week though, the benchmark gas contract rose 8.3%, after prior weekly losses of 1.7% and 7.7%.
Much of this week’s rally was driven by power burns that remained volatile as reporting authorities continuously revised their numbers, said analysts at Houston-based energy markets advisory Gelber & Associates.
“Another large decrease in power burn was reported today, this time a drop of 2.37 bcf/d (billion cubic feet on the day),” Gelber’s analysts said. “This marks the last of many such decreases this week; However, after previously released numbers on power burn change this week have continually been revised by data providers, likely due to difficulties in measurement from the magnitude of heat and usage driven by it this week.”
“After data revisions, the drop would leave power burn at 46.7 bcf/d, still a very high level for this time of year.”
Also aiding market sentiment this week was Vladimir Putin’s bid to escape Western sanctions on Russian gas via fertilizer deliveries that he demanded in exchange for reinstating the Black Sea Grain Initiative that the Kremlin withdrew from. Thursday’s rally on the Henry Hub was largely in response to Putin’s gambit, which, if successful, would reduce global stockpiling of gas.
Russia’s artillery continued to pound Ukrainian food export facilities on Friday while its navy seized ships in the Black Sea, escalating tensions after withdrawing from the U.N.-brokered safe sea corridor agreement.
The West hasn’t budged from the sanctions on Russia though while Turkey, the lifeline for Russian exports, is pressuring Moscow to go back to the Black Sea deal amid a potential crunch to its food supply - not to mention the global crisis Putin is potentially causing.
Natural gas: Price Outlook
A careful look at 4-Hour time frame indicates short-term price action remains trapped within a tight range of the 100 SMA of $2.66 as interim resistance and the 200 SMA of $2.56 acting as immediate support, Dixit of SKCharting said.
The mid-term outlook favors a bullish rebound supported by stability above the 50-day EMA dynamically positioned at the $2.53 level, waiting to break above the Daily Middle Bollinger Band of $2.66, while continuation of bullish momentum begins with retesting the swing high of $2.84, followed by the psychological handle of $3.00, Dixit added.
Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.