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Crude Oil, Gold Look to FOMC Outcome for Direction Cues

By , Currency Strategist
13 March 2012 09:55 GMT

Talking Points

  • Crude Oil, Copper Likely to Turn Lower on Neutral FOMC Outcome
  • Gold and Silver at Risk if Fed Rhetoric Further Dents QE3 Expectations

All eyes are on the Federal Reserve monetary policy announcement as global growth fears overtake the spotlight with Greece-linked issues finally fading out of focus. If the rate-setting FOMC committee continues to project the neutral-leaning tone consistent with recent commentary that proved so market-moving after Ben Bernanke’s Congressional testimony last month, the outcome is likely to prove negative for risk appetite.

The most significant headwind facing global economic growth this year is the widely expected recession in the Eurozone. With China likely to be hobbled by the downturn considering the currency bloc is its largest export market, the US is left as the last of the three major engines driving global output to serve as an offsetting force. An FOMC outing that positively acknowledges the economy's progress is likely to weigh on QE3 expectations, which in this context bodes ill for risky assets in that a US economy primed with stimulus is likely to be a more potent counterweigh to the slump in Europe than otherwise.

Such an outcome is likely to be directly negative for growth-sensitive crude oil and copper prices, where global business cycle considerations play directly into the outlook for demand. As for gold and silver, the response will prove negative as well, but for different reasons. On one hand, a diminished probability of QE3 will weigh on demand for precious metals as a store-of-value hedge against further dilution of fiat currency. On the other, the return of risk aversion will drive safe-haven demand for the US Dollar, amounting to de-facto downward pressure. Needless to say, a relatively dovish Fed that reboots speculation about an expansion of asset purchases is likely to produce the precise opposite of these dynamics.

WTI Crude Oil (NY Close): $106.34 // -1.06 // -0.99%

Prices put in a Bearish Engulfing candlestick pattern following a retest of support-turned-resistance at a rising trend line set from the February 2 low and broke below 106.50, the 23.6% Fibonacci retracement. Sellers now target the 38.2% Fib at 104.38. Trend line resistance is at 109.33.

Crude_Oil_Gold_Look_to_FOMC_Outcome_for_Direction_Cues_body_Picture_3.png, Crude Oil, Gold Look to FOMC Outcome for Direction Cues

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1701.32 // -12.32 // -0.72%

Prices put in a Dark Cloud Cover candlestick pattern below resistance at 1719.76, hinting a move lower is ahead. Initial support lines up at 1686.57, the 23.6% Fibonacci expansion level, and is reinforced by a horizontal pivot at 1677.05. Alternatively, a push higher through near-term resistance exposes the December 2 high at 1763.00.

Crude_Oil_Gold_Look_to_FOMC_Outcome_for_Direction_Cues_body_Picture_4.png, Crude Oil, Gold Look to FOMC Outcome for Direction Cues

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $33.66 // -0.63 // -1.84%

Prices remain locked between the 23.6% and 38.2% Fibonacci retracements at 32.97 and 34.59, respectively. Overall positioning broadly favors the downside absent a daily close above 37.48, the February 29 high and peak of a Bearish Engulfing candlestick pattern. A break above 34.59 initially targets 35.66, while a push through support exposes the 50% retracement at 31.67.

Crude_Oil_Gold_Look_to_FOMC_Outcome_for_Direction_Cues_body_Picture_5.png, Crude Oil, Gold Look to FOMC Outcome for Direction Cues

Daily Chart - Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.838 // -0.020 // -0.52%

Prices rebounded from support at 3.713, the would-be neckline of a Head and Shoulders top formation, to retest support-turned-resistance at a rising trend line set from mid-December (now at 3.872). A break above that on a daily closing basis would expose the January 27 high at 3.938. Alternatively, a reversal lower that takes out 3.713 exposes a measured downside target at 3.438.

Crude_Oil_Gold_Look_to_FOMC_Outcome_for_Direction_Cues_body_Picture_6.png, Crude Oil, Gold Look to FOMC Outcome for Direction Cues

Daily Chart - Created Using FXCM Marketscope 2.0

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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13 March 2012 09:55 GMT