By Barani Krishnan
Investing.com -- The dollar tumbled last week, giving bulls across commodity markets much-needed relief from the weight of a super strong greenback in five of the six previous weeks. The Bank of England’s counter move against the Truss administration’s lunacy of slashing taxes and boosting expenditure at the same time was what got the pound - and other most other currencies - up against the dollar.
But will the USD roar back to its 20-year highs in the week ahead?
It just might. A litany of Federal Reserve speakers did all they could last week to talk up the Fed’s mission of using super-sized rate hikes to bust inflation - and in the process sent the Dollar Index to a new 2022 peak of 114.75 on Wednesday before the BoE’s intervention to prop up the battered pound.
“A recession will not stop the Fed from hiking rates,” Cleveland Fed President Loretta Mester said. “Fed got wrong the persistence and magnitude of inflation. Given the persistence of inflation, it is still more important to ensure that the Fed does enough.”
U.S. inflation remains “very high” and could continue to shock as the Fed works on subduing the worst price pressures in four decades for Americans, Vice Chair Lael Brainard declared Friday. “Monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target,” Brainard added.
If there’s one thing Fed people have been good at the past year, it’s in talking the U.S. economy towards a recession. The only reason we haven’t gotten into one is because of a job market that just refuses to give up.
But push as hard the Fed is doing - and many say the central bank has no choice but to crash the economy now if it is to rescue it from inflation that could do worse later - then the Fed may just get its way.
And central to the Fed’s mission - maybe not intentionally - is this year’s massive ramp-up in the USD as the Dollar Index stands nearly 20% higher versus the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc.
The dollar’s surge has put other nations trying to boost their economies in a challenging position: raising interest rates would boost their currency but also put the brakes on economic recovery. China, which has slashed interest rates to tackle a slowing economy and stem a housing downturn, has seen the yuan fall to its weakest level in more than 14 years. The People's Bank of China has told major state-run banks to prepare to shed dollar holdings while snapping up offshore yuan, which has continued to fall despite prior interventions, sources told Reuters. The scale of this latest effort to prop up the yuan will be big and could provide a floor to the Chinese currency, according to the report.
The dollar’s withering impact on almost every commodity is evident this year, especially oil, where U.S. crude at under $80 a barrel sits with an annual gain of just 6% now versus some 50% back in March when it was at around $130.
On Friday, oil bulls again struggled to emerge from negative territory after another surprisingly higher U.S. inflation print for August reinforced expectations for more super-sized Fed rate hikes.
This was despite oil bulls being charged up ahead of next week’s meeting of the OPEC+ alliance of 23 oil producers and exporters. The 13-member Saudi-led Organization of the Petroleum Exporting Countries and its 10 Russia-steered allies are to meet on Wednesday to finalize output quotas for November.
Friday’s pressure on oil and other risk assets came after data showed the Fed’s preferred inflation indicator, the Personal Consumption Expenditures Index, grew 6.2% during the year to August, versus 6.4% in the 12 months to July.
Economists polled by US media had expected the so-called PCE Index to expand by just 6% during the year to August.
On a monthly basis, the PCE Index actually grew more in August than in July, rising 0.3% from a previous 0.1%. Economists had expected a monthly growth of just 0.2% in August.
The readings showed the Fed’s battle against inflation had barely eased despite sharp drops in gasoline prices over the past three months.
Gold, in contrast, posted a modest weekly gain as safe-haven ideas apparently crept back into the trade on the back of renewed recession fears - helping bullion’s longs catch a break from the resurgent dollar after a largely miserable September.
For the month though, bullion was down 3%, while for the quarter, it tumbled 7.5% for its worst quarter since March 2021.
Oil: Market Settlements and Activity
New York-traded West Texas Intermediate for November delivery did a final trade of $79.74, after officially settling Friday’s session at $79.49 per barrel, down $1.74, or 2.1%, on the day.
U.S. crude’s strong run-up between Tuesday and Wednesday, however, held the market in good stead for a small weekly gain in five, despite major losses for September and the third quarter - the first quarterly loss for oil in two years.
For the week, WTI was up almost 1%. For the month, however, the U.S. crude benchmark was down 12.5%. For the third quarter, it was down 24%.
Brent, the London-traded global benchmark for oil, did a final trade of $85.56 on its December contract, after officially settling Friday’s session at $85.14, down $2.04, or 2.3%.
“The crude demand outlook is not getting any favors from economic data or corporate reports,” said Ed Moya, analyst at online trading platform OANDA. “OPEC+ will have an easy job next week, but oil prices won’t catch a bid until energy traders are confident an aggressive reduction of output at around 1 million bpd will be delivered. Brent crude is poised to consolidate below the $90 level.”
Russia is pushing OPEC+ to cut output by a substantial 1.0 million barrels per day or around that, those familiar with the Kremlin’s thinking have said. But Moscow is unlikely to contribute much to any production cut by the alliance due to the ongoing impact on its energy exports from Western sanctions imposed over its invasion of Ukraine.
The Russians have also been undercutting others in OPEC+ by selling their crude at heavily discounted rates to buyers like China and India. A production cut by OPEC+ that Moscow does not fully participate in will benefit Russia more than the rest of the alliance as it might continue to steal customers from the others.
Also, OPEC+ has not met its monthly production targets for months, so any quotas announced by the group might be virtually meaningless. Case in point: A Reuters survey published Friday found OPEC+ raised its September crude oil production to the highest level since 2020 - yet failed to meet its September quota. Thus, on the way down too, the alliance might fall short of its target.
Oil: Price Outlook
Oil seems stuck between a rock and a hard place, with the Fed’s indirect support of the dollar and OPEC’s ministrations likely to pull crude both ways, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.
“Amidst prolonged volatility WTI continues with bearish innings for four months,” Dixit said.
He observed that with WTI below the monthly middle Bollinger Band of $82.20 after its test of $76.28, the Moving Average Convergence Divergence has begun printing a negative histogram while the monthly stochastics reading of 26/40 shows enough room for a further drop.
“The next drop brings the 200-Month Simple Moving Average of $72.35 on the radar,” Dixit said. “Breaching through $72.35 will extend the correction to the 50-month Exponential Moving Average of $70.”
He said positive grinding on the weekly stochastics of 9/6 may give WTI bulls “some breathing space” if prices exhibit recovery beyond the daily middle Bollinger Band of $83.75, above which the 50-Day EMA of $88.85 sits.
“Overall, the broader formation is perfectly bearish as confirmed by four months of negativity back-to-back. For now, $72 - $70 remain the nearest downside targets, while the 200-week SMA of $63.35 sits as the long-term support for trend reversal.”
Gold: Market Settlements and Activity
Gold’s benchmark futures contract on New York’s Comex, December, did a final trade of $1,668.30, after officially closing Friday’s session up $3.40, or 0.2%, at $1,672 per ounce.
The spot price of bullion, which is more closely followed than futures by some traders, officially settled last week at $1,660.98, up 37 cents, or 0.02%.
Gold’s four-day rebound reached a climax Friday when the spot price hit a one-week high of $1,675.35 after data showing another surprisingly higher U.S. inflation print for August that reinforced expectations for more super-sized Federal Reserve rate hikes. Gold is often seen as a store of value and a hedge against inflation and Fed rate increases.
“Inflation expectations matter and … things are starting to look better for gold,” said Ed Moya, analyst at online trading platform OANDA.
Despite Moya’s positive views, some analysts were less impressed with bullion’s outlook.
“Despite the price recently hitting a two-year high, it has been an inferior hedge, and the opportunity costs have been high,” Robert Cyran said in a commentary on gold Friday. “An investment 10 years ago in the S&P 500 Index would have tripled.”
Six straight months of negative closes have taken spot gold down $460 from a $2073 record high. US inflation at a four-decade high and the drawn-out Russia-Ukraine war have not been able to stir gold’s safe-haven standing as investors took their cues instead from the Fed’s super-sized rate hikes and the runaway dollar.
Gold: Price Outlook
“Oversold conditions make a case for short term rebound towards broken support turned resistance zone $1,680 - $1,700,” Dixit of SKCharting said in his outlook on spot gold.
Dixit said bears seemed to prefer to let gold rise a little so that they can reposition their shorts at those highs, citing aiming retest of $1,600 and $1, 560 which corresponds to 50% Fibonacci retracement of $1046 - $2073.
Spot gold’s positive overlap on the weekly stochastics reading of 19/10 does call for a short-term rebound towards the 200 week SMA of $1680, followed by a $1710 horizontal resistance, Dixit said.
“If gold finds acceptance above $1710, the rebound can very well extend to next resistance zone of weekly middle Bollinger Band $1765 and the 50-Week EMA of $1795, followed by the 100-week SMA of $1814,” he said.
The short-term horizon has potential only for a short-range rebound with the possibility of a drop towards $1640 and $1620, Dixit said.
“If the $1640-$1620 zone is breached, then gold can drop to $1,600 and $1,560 over the next few weeks,” he said. “On an immediate basis, $1645-$1638 would attract buyers aiming retest of $1681 and $1697-$1710."
Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.