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Crude Oil, Gold Prices Aim Higher Amid US Dollar Weakness

Crude Oil, Gold Prices Aim Higher Amid US Dollar Weakness

2011-10-20 12:44:00
Ilya Spivak, Sr. Currency Strategist

Talking Points

  • Crude Oil Likely to Rise as Risk Appetite Recovers on Earnings, EU Bailout
  • Gold Anchored to US Dollar’s Fortunes, May Gain if Risk Appetite Holds Up

WTI Crude Oil (NY Close): $86.11 // -2.23 // -2.52%

Crude oil remains firmly anchored to underlying risk appetite via a correlation with the S&P 500, with healthy gains on futures contracts tracking the benchmark index hinting the WTI contract is likely to advance. A broadly positive batch of third-quarter earnings reports released ahead of the opening bell on Wall Street as well as supportive news from the EU is fueling optimism.

The so called “Troika” of the EU, the IMF and the ECB moved to approve the next tranche of aid for Greece despite the country’s inability to meet budget requirements and a rough outline of policymakers’ plan to contain the debt crisis began to emerge. Early reports seem to suggest the EU is prepared to offer countries as much as 10 percent of GDP in “precautionary aid” before they face major funding difficulties, although where said money would come from is uncertain.

The economic calendar is relatively quiet, with the Philadelphia Fed gauge of business confidence, the Existing Home Sales report and the Leading Indicators composite reading on tap. The former of the three is likely to take up the lion’s share of investors’ attention as traders piece together the various regional Fed surveys released this week as well as yesterday’s Beige Book survey to establish a pulse on the pace of growth in the world’s top economy.

On the technical front, things look relatively grim compared to the somewhat rosy short-term fundamental landscape. Prices put in a Bearish Engulfing candlestick pattern below resistance at 90.10, arguing for a downward reversal from here. Initial support stands at 84.61, the 23.6% Fibonacci extension level. A break below that exposes the 38.2% Fib at 80.97.

Crude_Oil_Gold_Prices_Aim_Higher_Amid_US_Dollar_Weakness_body_Picture_3.png, Crude Oil, Gold Prices Aim Higher Amid US Dollar Weakness

Spot Gold (NY Close): $1640.75 // -17.10 // -1.03%

The trajectory of the US Dollar has return as the main catalyst of gold price action, serving as a transmission mechanism for risk appetite trends. With this in mind, the strong showing on S&P 500 index futures ahead of the North American trading open hints the path of least resistance favors the upside as the greenback stumbles amid lacking safe-haven demand.

Sizing up the technical landscape, prices are testing through support at the bottom of a rising channel carved out since late September, with a break lower exposing the 23.6% Fibonacci extension at 1603.16. Initial resistance is at 1638.11, the 14.6% level, as well as the October 19 session close at 1659.90.

Crude_Oil_Gold_Prices_Aim_Higher_Amid_US_Dollar_Weakness_body_Picture_4.png, Crude Oil, Gold Prices Aim Higher Amid US Dollar Weakness

Spot Silver (NY Close): $31.16 // -0.89 // -2.76%

As with gold, silver is looking to the US Dollar as the conduit for the influence of risk sentiment trends, with directional cues unclear so far as markets look for direction. Prices are testing below support at $30.98, the 14.6% Fibonacci extension level, with a break below that exposing the 23.6% boundary at $29.42. Near-term resistance is marked by the September 27 high at $33.51.

Crude_Oil_Gold_Prices_Aim_Higher_Amid_US_Dollar_Weakness_body_Picture_5.png, Crude Oil, Gold Prices Aim Higher Amid US Dollar Weakness

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

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

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com

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