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Crude Oil Prices Diverge from Risk Trends as US Dollar Gains

Crude Oil Prices Diverge from Risk Trends as US Dollar Gains

Ilya Spivak, Head Strategist, APAC

Talking Points:

  • Crude oil slips below $45/bbl despite swelling risk appetite
  • Gold prices edge lower but familiar range remains in place
  • Comments from Federal Reserve, BOE officials in the focus

Crude oil prices declined despite swelling risk appetite yesterday as the US Dollar swung upward, pressuring assets prices denominated in terms of the benchmark currency. Gold prices likewise declined, reflecting the same dynamic. The greenback found broad-based strength as a sharp USD/JPY rally echoed elsewhere in the FX space.

Curiously, Fed policy bets appear to have played a role as well. Rate hike expectations have quietly firmed having plunged in the wake of the UK Brexit referendum. Indeed, the chance of a hike by year-end (embedded in Fed Funds futures) is now 28.7 percent compared with 11.8 percent last week. The rate level implied in the December 2016 contract posted the largest daily gain in 2 weeks yesterday.

Cautiously hawkish rhetoric from Esther George and Loretta Mester – Presidents of the Kansas City and Cleveland Fed branches respectively – may have helped inspire signs of life in the US policy outlook. It will be interesting to see if less overtly hawkish officials pick up the same narrative. Comments from Governor Daniel Tarullo as well as St. Louis and Minneapolis Fed Presidents James Bullard and Neel Kashaki are due to cross the wires today.

On the sentiment front, Brexit-related news flow is back in the spotlight. The Bank of England will publish minutes from the post-referendum FPC meeting and policymakers including Governor Carney will testify on financial stability before Parliament’s Treasury Committee. With the markets steadying after a sharp deterioration in financial conditions in the vote’s immediate aftermath, traders may be most interested in what the central bank is doing to soften Brexit’s longer-term implications.

Where are gold and crude oil prices heading in 3Q? See our forecasts here!

GOLD TECHNICAL ANALYSISGold prices are marking time in a narrow range after finding resistance below the $1400/oz figure. Near-term support is at 1349.42, the 14.6% Fibonacci retracement, with a daily close below that exposing the 23.6% level at 1333.62. Alternatively, a move above the 23.6% Fib expansion at 1376.74 sees the next upside barrier at 1402.36, the 38.2% threshold.

Crude Oil Prices Diverge from Risk Trends as US Dollar Gains

CRUDE OIL TECHNICAL ANALYSISCrude oil prices are eyeing support at 41.86, the 50% Fibonacci retracement, after breaking below the 23.6% level at 45.60. A further push beneath this boundary exposes the 50% Fib at 38.84. Alternatively, a reversal back above 45.60 – now recast as resistance – aims for a falling trend line at 48.87.

Crude Oil Prices Diverge from Risk Trends as US Dollar Gains

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

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