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Crude Oil, Gold and Copper Outlook Hinges on FOMC Rate Decision

Crude Oil, Gold and Copper Outlook Hinges on FOMC Rate Decision

2012-01-25 10:30:00
Ilya Spivak, Head Strategist, APAC
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Talking Points

  • Crude Oil May Rise Regardless of FOMC Policy Announcement Outcome
  • Gold, Silver to Decline if Fed Rates Outlook Weighs on Inflation Outlook
  • Copper Technical Positioning Hints a Top is Forming Below 390.00 Figure

WTI Crude Oil (NY Close): $98.95 // -0.63 // -0.63%

Crude oil prices bounced yesterday amid reports that Canada will begin shipping oil sands output to China after the US stonewalled the Keystone XL pipeline project to transport supply to the Gulf Coast. Canada is the US’ largest overseas crude oil supplier. Looking ahead, the focus turns to the FOMC interest rate decision, where Ben Bernanke and company will for the first time unveil their projections for benchmark interest rates.

The unprecedented move will be followed by a press conference with the Fed chairman. Traders will treat these bits of information to shape their outlook for US economic growth. Reinforcement of the cautiously positive tone emerging in recent data releases may stoke the demand outlook and encourage crude higher still, although a growth-negative result that stokes QE3 expectations may weigh on the US Dollar and drive the WTI contract upward in any case.

On the technical front, positioning is broadly unchanged from yesterday. Prices continue to consolidate above support at 97.70, with the first layer of resistance still at 101.28. A break lower exposes resistance-turned-support at the top of a falling channel set from mid-November, now at 96.53. Alternatively, a push higher initially targets the mid-November high at 103.35.

Crude_Oil_Gold_and_Copper_Outlook_Hinges_on_FOMC_Rate_Decision_body_Picture_3.png, Crude Oil, Gold and Copper Outlook Hinges on FOMC Rate Decision

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1665.18 // -11.50 // -0.69%

As we discussed yesterday, the pickup in US economic data coupled with a pledge to keep rates at “exceptionally low” levels through mid-2013 has stoked inflation expectations, allowing gold to drift higher. This dynamic faces a formative test today however as FOMC policymakers unveil their rates outlooks. If the average path of borrowing costs points to a relatively more hawkish bias than is currently priced in, gold may quickly find itself facing substantial selling pressure. Needless to say, the reverse is likewise likely to be the case.

Sizing up the chart setup, pricesput in a Bearish Engulfing candlestick pattern below support-turned-resistance at 1677.05, hinting a move lower is ahead. Initial support stands at the bottom of a rising channel set from early January now at 1657.98, with a break below that exposing 1638.84.

Crude_Oil_Gold_and_Copper_Outlook_Hinges_on_FOMC_Rate_Decision_body_Picture_4.png, Crude Oil, Gold and Copper Outlook Hinges on FOMC Rate Decision

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $32.06 // -0.28 // -0.87%

As with gold, the FOMC decision and its implications for the inflation outlook will be the critical driver of silver price action today. The technical setup is little changed from yesterday. Prices are edging lower after showing a bearish Spinning Top candlestick below rising channel resistance, with sellers aiming for initial support lines up at 31.04. The channel top is now at 32.91.

Crude_Oil_Gold_and_Copper_Outlook_Hinges_on_FOMC_Rate_Decision_body_Picture_5.png, Crude Oil, Gold and Copper Outlook Hinges on FOMC Rate Decision

Daily Chart - Created Using FXCM Marketscope 2.0

COMEX Copper (NY Close): $380.75 // +0.90 // +0.24%

The outlook for copper prices heading into the FOMC announcement largely mirrors that of crude oil as the cycle-sensitive metal looks to the outcome as a barometer on US growth to inform the outlook for demand. As with the WTI contract however, there is some ambiguity in the implications of a relatively dovish result in that the increased chance of QE3 may boost prices regardless of its negative implications for physical demand.

With that in mind, technical positioning increasingly argues for a top in the works. Prices followed a Bearish Engulfing identified yesterday with a Hanging Man candlestick, further reinforcing the case for a downside scenario. Initial support lines up at 371.50, with a break below that exposing 356.50. Near-term resistance remains at 390.00.

Crude_Oil_Gold_and_Copper_Outlook_Hinges_on_FOMC_Rate_Decision_body_Picture_6.png, Crude Oil, Gold and Copper Outlook Hinges on FOMC Rate Decision

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 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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