By Barani Krishnan

Investing.com – The Federal Reserve appears almost certain that it will approve a 50% (or 50-basis) point rate increase at Wednesday’s May meeting. It is the Federal Reserve’s first major hike of this magnitude in 20 years. That likely won’t be the peak yet for the Fed. The Fed is expected to raise interest rates by 75 basis points at its June meeting, according to money market traders. If the central bank goes that far, it’ll be on the assumption that the U.S. economy “can take it” and that inflation must be beaten “at all cost”.

However, can this economy take these rate rises without getting drained? The question is, instead, is the Fed planning to clamp down on the economy, particularly in the wake of spiralling wages, the major causes of the current price pressures. 

The Fed’s slowdown in the employment market will impact the oil market. This is because the Fed has a nexus with the market.

While high oil prices may impact economic growth, they do not necessarily affect a market for jobs like that in the U.S. right now. However, the possibility of a slower job growth or worse, a spike in unemployment (just like what happened two years ago at the heights of the Covid outbreak) will likely lead to crude oil prices falling. While any immediate impact on crude oil prices might not occur, it is unlikely to be this week. This is because the Fed meeting will take place just one day before OPEC+. OPEC+ is a global oil producer alliance whose primary job, in addition to ensuring stable supply, is to keep a barrel above $100. 

Higher interest rates are the Fed’s go-to mechanism for tackling inflation, as they make the cost of borrowing or investing more expensive, and can put a damper on spending by both households and businesses. If companies decide they don’t need as many employees, then the current high demand for workers could also ease up. 

Jerome Powell, Fed Chairman, argues that this year’s steady stream of rate rises can reduce. Inflation and the U.S. Economy grew at an unprecedented pace, with jobs growth reaching record levels. These two factors have not slowed down, and the economy has been growing steadily.

The Fed’s plan tackles the demand side of the economy. Rate hikes alone can’t increase the supply of workers or assuage people’s fears of getting sick from Covid. They can’t provide child care for working parents, change immigration policy or entice early retirees – some 2.6 million by some estimates – back into the labor force.

Economists also say the Fed’s plan will be extremely difficult to pull off given the uncertainty of the post-pandemic world. Russia’s invasion of Ukraine has roiled global energy markets, with the widespread expectation that American households will feel the sting at the gas pump. Recent Covid shutdowns at major Chinese manufacturing hubs have also renewed global supply chain woes, and offer a sobering reminder of the pandemic’s ongoing economic threat.

The Fed has to accomplish both the dual goals of fighting inflation and revitalizing the job market without creating new recessions or forcing businesses to lay off workers. The Fed’s track record in raising interest rates enough to cool the economy is mixed. Many economists only point to 1994 as an example of when it was able to raise rates while not causing the economy shrink.

The history has been atypically opposite. The Fed has initiated nine cycles of full rate rises since 1961 to counter inflation. According to Piper Sandler research, eight of these rate hikes were followed by recessions. 

Already, the first quarter 2022 saw a contraction of 1.4% in. After a remarkable 5.7% rise in 2021 due to the recovery from Covid ravages 2020 which caused a 3.5% decrease in GDP that year, the U.S. suffered its first recession since 2008/09. 

“What Powell is saying is ‘this time is gonna be different,’” Roberto Perli, a former Fed economist and now head of global policy at Piper Sandler, said in comments carried by the Washington Post. “Maybe there will be a time when it’s different. But that’s always a dangerous thing to say.”

There’s also another problem.

OPEC+, just like the Fed, is determined to end the U.S. inflation. OPEC+ also wants oil prices not to reach the lowest levels of Covid 2020. These are the dynamics we have to keep in mind as the Fed isn’t going to be able to reduce inflation without getting oil prices down – wage spiral and demand for workers being just one part of the problem – and OPEC+ isn’t going to roll over and play dead while the central bank and the combined forces of the Biden administration try to take an ax to the oil market. 

When push comes to shove, OPEC+ will keep squeezing crude production to ensure prices don’t fall too far from where they are. It might prove difficult to keep oil under $100/barrel with summer air travel and U.S. highway trips around the corner.

There is something, however, bigger than even the Fed and OPEC+ and that is the U.S. consumer, who accounts for 70% of the country’s GDP. 

Millions of Americans have been working since the Covid crisis and lower prices are their top priority.

A new U.S. survey by University of Michigan found that Americans feel the Fed won’t be able to soften the blows from its aggressive rate rises. 

The consumer will reduce discretionary spending if they fear the worst. This will cause growth to slow and almost everything else will drop. 

It might take some time. 

Oil: Weekly Settlements & WTI Technical Outlook

In Friday’s trade, crude, the London-traded global benchmark for oil, settled down $1.18, or 1.1%, at $106.08 a barrel. 

Brent gained 2.5% for the week. Brent rose 1.3% in the past month. While it was Brent’s smallest monthly gain since December, it nevertheless ensured an unbroken winning streak over the past five months that gave longs in the global crude benchmark a windfall of 55%.

New York: The WTI benchmark, which is U.S. crude, settled at $104.11/barrel, down $1.25 (1.19%)

WTI increased almost 2% for the week. The month saw a 4.4% increase. Brent’s Brent Index has seen a similar increase in WTI over the last month, with a 58% premium recorded in the five previous months.

Despite Thursday’s OPEC+ meeting, oil prices could trend lower the first three days of the week as investors’ focus as a whole rests on the Fed ahead of the central bank’s rate decision on Wednesday.

WTI Technical Charts also indicate the same.

“With weekly stochastic and Relative Strength Indicators positioned in sideways-range with neutrality, wild swings will likely continue,” said Sunil Kumar Dixit, chief technical strategist at skcharting.com.

WTI could retest $101 – $98 support areas last week. This is where buyers might surface to resume bullish momentum in the $105-108 resistance area and liquidity areas.

“If this $105 – $108 resistance area attracts enough buyers, expect momentum to ride higher to $109 – $113 and even extend to $116,” Dixit said.

Weekly Activity in the Gold Market 

The world’s much-touted hedge against inflation is again finding it difficult to live up to its billing, usurped by its rival’s biggest rally in seven years.

The April close of gold was almost 22% lower than the Friday rise of 1%, which marked its second monthly decline since 2022. However, it still held above $1,900 per ounce, which is still a bullish level. 

Gold’s decline came as yellow metal’s nemesis, the dollar, scored its biggest monthly gain in 10 years. The greenback was compared against six of the major currencies in the. It climbed more than 4.6% for April. This is its largest increase since January 2015. In one of its most impressive winning streaks, the Dollar Index has only fallen in four out of 20 trading sessions. 

The dollar’s outsize rally came in anticipation of a higher rate regime the Federal Reserve was expected to adopt over the remainder of 2022 – and possibly 2023 – as the central bank aims to contain U.S. inflation growing at its fastest pace in four decades.

“The dollar rally has been relentless and it’s been a real drag on the yellow metal – which begs the question, is anything going to stop the dollar in the near term?” asked Craig Erlam, analyst at online trading platform OANDA. “If not, what does that mean for gold?” 

As Friday’s session wrapped April trading for markets, front-month for June on New York’s Comex stood at $1,896.90 – up $5.60 or 0.3%, on the day. It was 1.9% lower for the month but it gained 4.5% over the year.

On April 18th, June gold reached a six week high of $2,000.03 on fears that aggressive Fed inflation control measures could lead to a recession in the United States. Gold is often used as an insurance against both political and economic worries. 

A succession of Fed speakers had, however, soothed some market worries that the economy could turn negative from the central bank’s attempts to put a lid on price pressures growing at their fastest pace in 40 years.

Although fears about an economic crash haven’t disappeared, some people are now more optimistic, particularly with regard to the Sterling labor market. This has seen the dollar, the main beneficiary of rate increases, rallying and causing gold and other safe havens to suffer.

“It’s been an awful couple of weeks for gold since breaking above $2,000 for the first time in over a month,” Erlam noted. “Gold will continue to see safe haven and inflation hedge appeal so I don’t see the recent rate of decline continuing, even if the dollar remains strong. That said, there isn’t much of a bullish case for the yellow metal if the dollar continues to tear higher.”

In Thursday’s trade, the Dollar Index hit a 25-month high of 103.945.

The yields on U.S. bonds, which are often side-by-side to the dollar in many cases, has also increased in the two most recent sessions. This is despite the fact that they have been decoupling recently from the greenback. Following a 29% increase in March, the April yield rose nearly 24%.

The inflationary pressure continues in this first quarter with the PCE Index increasing 6.6% over the past year. GDP dropped 1.4% between January and March. The United States will automatically enter recession if the GDP contract in the second quarter.

It was after the 2020 COVID-19 epidemic that the economy went into recession the last time it did. 

“The probability of consumers reaching a tipping point will increasingly depend on prospects for a strong labor market and continued wage gains,” Richard Curtain, chief economist at the University of Michigan, said in the closely-followed poll for April released Friday.

In recent years, the U.S. labor market is the most vibrant sector of its economy. Employment has reached record levels after recovering from all-time lows two years back.

In April 2020, the US saw a new record of 14.8% unemployment. This was despite the fact that there were 20 million job losses in the wake of the coronavirus epidemic. However, employment has been excellent over the last year with the unemployment rate dropping to 3.6% in March. A jobless rate of 4.0% or below is regarded by the Federal Reserve as “maximum employment”.

Technical Outlook for Gold

According to Dixit, skcharting, as long as gold remains below $1,900 for the next days, the, which is his primary gauge, can move lower than $1,875.

“A sustained move below $1870 may push spot gold down to the 50-week Exponential Moving Average of $1,850 and the 100-week Simple Moving Average of $1,837,” said Dixit. “If gold breaks below $1837, $1,818 will likely to hold as support.”

But while weekly stochastic and RSI levels were bearish, daily oversold parameters may help reduce gold’s downside or even help it catch a bid higher.

“As the primary trend is still up, institutional buying from central banks is supposed to resurface for value buying in gold, which should resume the next wave up,” Dixit said. “On reversal from the lows, gold will have to clear $1,900 – $1,935 as first hurdle, followed by $1,960 and $2,000.”

Disclaimer:Barani Krishnan has no positions in the commodities or securities that he writes about.