US and European futures continue their struggle as traders have become immensely worried about the current volatility in the market, which is due to the geopolitical tensions in Ukraine and the newly implemented lockdowns in China. No one wanted to see new lockdowns as we were only about to get back on the recovery track, but of course, the war in Ukraine dented that sentiment. Now traders are looking at two situations and wondering what is worse: the war and its implication on the global economy or the supply chain disruption that has dragged the Nasdaq index into a bear market for the first time since 2020.
Oil
Last week, money managers slashed their net-bullish Brent oil bets to their lowest levels on record. The retreat demonstrates significant swings in the oil market were part of a broad-based liquidation of positions, with speculators closing out long contracts in WTI, diesel, and gasoline futures. According to ICE, the fall in Brent was fuelled by the largest drop in outright bullish bets since 2018. The global crude benchmark briefly approached $140/bbl for the first time since 2008 a day earlier, but it has since fallen to roughly $108.
Traders are also keeping a close watch on the Iran and US nuclear deal. Tehran has made its position very clear about the landmark nuclear deal with the US. It must address Russia’s demand that sanctions imposed in response to its invasion of Ukraine do not obstruct Moscow’s relations with Tehran. Talks are taking place between the US and Iran, and traders hope there will be a resolution after their long halt that can change the current situation. But there is too much at stake because it is hardly possible that the US will agree to Russian demands. Additionally, Israel and the UAE have also listed their security demands.
Finally, keep a close on the US oil production. As the battle in Ukraine strains supplies and rising gasoline prices drive inflation, President Joe Biden is under pressure to use Cold War-era authorities to compel domestic oil production. Lawmakers and labour activists have urged Biden to use the 1950 Defence Production Act, which Harry Truman used to compel the deployment of drilling rigs and solar panels during the Korean War.
Forex
It is all about two events in the forex market, and most traders have their eyes on one of them—the Fed meeting. For the first time since 2018, Jerome Powell, the Fed Chairman, is expected to hike interest rates at the forthcoming meeting (Wednesday). The Fed Chairman has already voiced his opinion during his recent appearance where he made it clear to Congress that the committee is of the mind frame it will choose to raise the federal funds rate by 25 basis points. He believes this is an appropriate direction for the FOMC to begin with.
The Fed has been under pressure to increase the interest rate due to the steady drumbeat of rising inflation numbers. They don’t have any other choice but to act on this occasion.
Under normal circumstances, the statistics from the interim meetings would support a 50-basis-point increase. However, the current situation is extraordinary – oil prices soared past $130 earlier this week before plummeting to around $110, demonstrating the unpredictability of war. The world’s financial markets have taken a risk-off stance.
Nonetheless, some FOMC members may favour a more significant raise and vote against the committee’s majority. Market players will be keeping their eyes wide open for such an occasion. The reality is that central banks have difficult decisions to make whenever they face a situation that is influenced by a supply shock.
When an adverse supply shock hits the economy, central banks must make difficult decisions: doing too many risks pushing the economy into recession while doing too little risks unanchoring inflation expectations. The worst is yet to come in terms of inflation news.
Bitcoin
More and more regulators finally understand the power of Bitcoin, and yesterday we had the EU voting against the banning of Bitcoin. This is a massive positive outcome for Bitcoin and the entire cryptocurrency space, but traders haven’t picked up on this yet. This is because Bitcoin’s price continues to trade lower today, and it seems like bulls are struggling to break the current bearish price action.
Bitcoin price continues to threaten the 38K price level, and traders are hoping that the price will stay above this price point as that will increase the odds for Bitcoin to break above its 50-day SMA on the daily time frame, which is the immediate resistance.
In terms of fundamentals, traders watch the Fed meeting as the main event for cryptos; an increase in the interest rate is likely to push the dollar index higher. But no matter how much interest rate hike there will be, inflation is likely to stay here for the rest of the year, which should help Bitcoin price.
Gold
The precious metal is struggling to hold on to its gains, and for the past three days, we have seen the price moving in one direction and one direction only, and that is downward. Most of that price action is driven due to the upcoming Fed meeting. The Fed is expected to increase the interest rate, and their decision is due tomorrow. Traders are wondering if the Fed will be more hawkish in their tone than their actual action. If we see a more hawkish commentary, there are greater chances for the gold price to fall further. 1900 is the major support level for the gold price for now.