Equity markets are a long way away from being out of the woods as the US equity is constantly flirting with a bear market, and we saw that happen again for the S&P 500 on Friday. The Nasdaq has dropped more than 20% from its all-time, and the index has been trading in a bear market. It was mainly the S&P 500 index, among the other two indices, the Dow and Nasdaq, trying to keep the sentiment somewhat positive.
Nonetheless, it is essential to note that the equity markets are mostly oversold, and there are strong chances that we will see some bargains taking place this week. But, this doesn’t mean that the downtrend will change its direction. As long as the threat of stagflation continues, traders are unlikely to feel comfortable backing riskier assets.
There is no doubt that there is a lot of pessimism among traders in the UK, and although we saw positive retail sales last week, the general stance towards the Sterling is bearish. Today, we will hear from the Bank of England’s governor, Andrew Bailey, and the focus will be on how the bank thinks that it can bring inflation lower. So far, the bank has increased interest rates a few times this year, and it is already walking on the most hawkish monetary path in decades. Still, with inflation at a multi-decade high, the bank has few options at its disposal. In addition to this, there is also enormous chaos from Brexit, and issues are still unresolved, and Brexit itself has made the UK’s economic data weak. In short, there are little to no reasons that one may want to hold a bullish view of the Sterling. The recent upward move in Sterling that we saw last week may not last for long, and the overall trend could retake control of the price action.
Regarding the week ahead, the most important economic event for this week is going to the FOMC Meeting Minutes, which are coming out on Wednesday. It is widely anticipated that the Fed will stay on autopilot, which means an interest rate hike of 50 basis points in the coming meetings. Traders will be looking closely at the Minutes release to see if the bank will adjust its inflation target.
As for the Euro, the ECB’s President Christine Lagarde will be speaking on Wednesday. The EUR/USD parity calls are still very much anchored in place. The President is likely to give further clues if the ECB will increase the interest rates in July or if traders will have a wait a little longer. Overall, the fall out of the geopolitical tensions due to the conflict between Russia and Ukraine adversely influences economic numbers. The fear is that we could see stagflation taking place in Europe in the coming weeks.
The precious metal recorded its first positive week in nearly four weeks, and the upward move in the gold price is mainly because investors are parking their money in a less risky asset such as gold. There is no doubt that traders are worried about recession taking place, and economic numbers suggest that it is only a matter of time before we will see that. The weakness in the dollar index, which we saw last week, is also going to remain in focus, and if the dollar index begins to pick up upward momentum again, we could see some of the shine coming off from the gold price.
As we mentioned earlier, the FOMC Minutes, due on Wednesday, remain the key economic event for the gold price, which is likely to make or break the rally for the gold price.