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Crude Oil May Extend Gains as Gold Falls on BOE Inflation Report

Crude Oil May Extend Gains as Gold Falls on BOE Inflation Report

Ilya Spivak, Head Strategist, APAC

Talking Points:

  • Gold price recovery stumbles as Kuroda comments boost US Dollar
  • Crude oil prices add to inventories-linked rally as risk appetite firms
  • BOE “Brexit” worries may stoke follow-through on overnight moves

Gold prices moved higher in yesterday’s session, with the move seemingly reflecting a down-shift in Federal Reserve rate hike expectations. Indeed, the metal moved inversely with the policy bets implied in Fed Funds futures contracts. Follow-through failed to materialize overnight however dovish commentary from BOJ Governor Haruhiko Kuroda. The central bank chief stressed policymakers’ readiness to boost stimulus and warned that tightening may not occur within his tenure.

This bolstered Japan’s benchmark Nikkei 225 stock index and sent USD/JPY higher, which echoed as broader US Dollar strength around the financial markets. Gold is denominated in terms of the greenback on global markets, so naturally this inherently weighed on prices.A stronger US unit likewise undermined anti-fiat demand for the yellow metal.

Crude oil prices jumped after EIA data showed an unexpected drawdown of 3.41 million barrels in the first week of May. The WTI contract managed a bit of follow-through in Asian hours, tracking shares higher amid a broad-based recovery in risk appetite. The risk-on mood was amplified by the aforementioned Kuroda commentary early in the session.

Looking ahead, all eyes are on the Bank of England as Governor Mark Carney and company deliver a monetary policy announcement as well as release an updated Quarterly Inflation Report. Traders will be most interested in officials’ views on the impact of the upcoming “Brexit” referendum on near-term monetary policy trends.

The BOE has previously warned that a decision to leave the EU may trigger a strong negative response from financial markets as investors flee the uncertainty of the unprecedented outcome. Ramping up ominous rhetoric this time around may be seen as likely to influence voters to opt in favor of staying within the regional bloc, which may (somewhat counter-intuitively) boost market-wide sentiment.

Crude oil prices are likely to follow shares higher in a risk-on scenario. Meanwhile, gold prices may move lower as an improving market mood saps demand for Treasuries and pushes yields upward, undermining the attraction of assets that don’t offer interest income.

Are FXCM traders betting on gold strength or weakness? Find out here!

GOLD TECHNICAL ANALYSISGold prices edged higher after finding interim support at 1261.70, the 23.6%Fibonacci expansion. Near-term resistance stands in the 1294.26-1307.49 area, marked by the January 22, 2015 high, the 38.2% level, with a break above that on a daily closing basis exposing the 50% Fib at 1324.58. Alternatively, a push below support targets channel floor support at 1232.13.

Crude Oil May Extend Gains as Gold Falls on BOE Inflation Report

CRUDE OIL TECHNICAL ANALYSISCrude oil prices accelerated upward after carving out support above the 43.00 figure, making for the strongest two-day rally in three weeks. However, topping cues signaled by the formation of a bearish Evening Star candlestick pattern remain intact for now. From here, a daily close above the 38.2% Fibonacci expansion at 47.41 exposes the 50% level at 48.77. Alternatively, a turn back below 23.6% Fib at 45.73 aims for the 14.6% expansion at 44.69.

Crude Oil May Extend Gains as Gold Falls on BOE Inflation Report

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

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