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Commodities: Crude Oil, Gold May Fall as Fed Disappoints Dovish Bets

By , Currency Strategist
12 December 2012 09:01 GMT

The Federal Reserve may disappoint financial markets’ expectations for ramp-up in stimulus efforts, sending crude oil, copper, gold and silver prices downward.

Talking Points

  • Crude Oil to Follow Stocks’ Response to FOMC Rate Announcement
  • Gold, Silver to Turn Lower if Fed Disappoints on Dovish Expectations

All eyes are on the Federal Reserve monetary policy announcement. At the heart of the decision is the fate of Operation Twist – a program designed to refocus the Fed’s QE1/QE2 stimulus efforts toward reducing long-term borrowing costs – due to expire this month. The markets’ consensus appears to call for Twist to be replaced with an equivalent-sized “unsterilized” bond-buying scheme, implying the central bank’s balance sheet will increase by an additional $45 billion each month.

Such an outcome is likely to be treated as a meaningful move to the dovish side of the policy spectrum, boosting risk appetite and broadly weighing on the US Dollar amid elevated dilution fears. In this scenario the cycle-sensitive crude oil and copper are likely to follow stocks higher. Meanwhile, inflation-hedge demand is likely to push gold and silver upward.

An expansion of stimulus doesn’t seem to be a foregone conclusion however. A recent run of supportive US economic data – most critically the service-sector ISM and NFP data points – as well as the Fed’s own upbeat Beige Book survey suggest the door is open for the FOMC to take a less aggressive posture. Opting to extend Twist (or a similar sterilized effort) or introducing an outright purchase program smaller than $45 billion threatens to weigh heavily on risk appetite, with selling pressure spilling into the commodities space.

Besides the fate of Operation Twist, traders will likewise look to revisions in the FOMC’s economic forecasts and the tone of Bernanke’s quarterly press conference for additional guidance. Bleak cues on either front may cap risk aversion following a relatively hawkish outcome, opening the door for more easing in 2013. On the other hand, signs of optimism may undermine sentiment if the fully unsterilized approach is indeed adopted or spur an outright selloff if the committee eschews balance-sheet expansion for now.

WTI Crude Oil (NY Close): $85.79 // +0.23 // +0.27%

Prices moved lower as expected after putting in a Shooting Star candlestick. A bearish continuation Flag chart pattern now appears to be validated with a break through the setup’s lower boundary, initially exposing the 38.2% Fibonacci expansion at 84.04. A further push below that targets the 50% level at 82.13. Flag bottom support-turned-resistance is now at 85.94, with a reversal back above that aiming for the 23.6% Fib at 86.45.

Commodities_Gold_Silver_Wait_on_FOMC_Outcome_for_Direction_Cues_body_Picture_4.png, Commodities: Crude Oil, Gold May Fall as Fed Disappoints Dovish Bets

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1710.05 // -2.65 // -0.15%

Prices broke lower after putting in a Bearish Engulfing candlestick pattern, taking out support at a rising trend line set from late June. Sellers are retesting this barrier as resistance (now at 1715.26), with a Hanging Man candle warning that selling pressure maybe set to reemerge. Bearish resumption initially targets the November 5 low at 1672.50.

Commodities_Gold_Silver_Wait_on_FOMC_Outcome_for_Direction_Cues_body_Picture_3.png, Commodities: Crude Oil, Gold May Fall as Fed Disappoints Dovish Bets

Daily Chart - Created Using FXCM Marketscope 2.0

Want to learn more about RSI? Watch this Video

Spot Silver (NY Close): $32.99 // -0.27 // -0.82%

Prices are testing the 23.6% Fibonacci expansion (33.28), with a break higher exposing the November 29 close at 34.24 and channel support-turned-resistance at the 34.76. Support is at 32.59, the 38.2% Fib. A drop below that aims for the 50% level at 32.03.

Commodities_Gold_Silver_Wait_on_FOMC_Outcome_for_Direction_Cues_body_Picture_2.png, Commodities: Crude Oil, Gold May Fall as Fed Disappoints Dovish Bets

Daily Chart - Created Using FXCM Marketscope 2.0

Want to learn more about RSI? Watch this Video

COMEX E-Mini Copper (NY Close): $3.686 // -0.020 // -0.54%

Prices broke above resistance at 3.676, the 50% Fibonacci expansion, exposing the 61.8% level at 3.742. A further push higher beyond that aims for the 76.4% Fib at 3.821. The 3.676 level has been recast as near-term support. A reversal back below that aims for trend line resistance-turned-support set from the September 14 swing high, now at 3.630 and the 38.2% level at 3.612.

Commodities_Gold_Silver_Wait_on_FOMC_Outcome_for_Direction_Cues_body_Picture_1.png, Commodities: Crude Oil, Gold May Fall as Fed Disappoints Dovish Bets

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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12 December 2012 09:01 GMT