Crude Oil Price Drop May Continue on Inflation Impact Fears

Crude oil prices drop with stocks as FOMC minutes feed inflation debate Wall Street index futures warn that deeper losses are in the cards ahead Technical positioning hints WTI may fall to challenge the $60/bbl figure

Crude oil prices fell as investors’ mood broadly soured across global financial markets yesterday. The benchmark WTI contract tellingly fell alongside the bellwether S&P 500 stock index, a proxy for overall risk appetite. The move seems to reflect growing concerns about inflation, and the policy response to it.

Minutes from April’s FOMC meeting revealed that central bank officials are cautiously mulling earlier stimulus withdrawal than they’ve previously conceded. This follows higher-than-expected CPI, PPI and wage inflation readings in recent weeks.

In fact, investors have been concerned about a sticky upshift in the cost structure for some time, with market-based measures of inflation expectations pushing upward. That has played out in tandem with realized results on price growth data increasingly outperforming relative to economists’ baseline forecasts.

Looking ahead, a relatively thin offering on the economic docket may leave current trends intact. That bodes ill for crude oil prices.

Indeed, futures tracking Wall Street averages are pointing conspicuously lower ahead of the opening bell even as shares rise in European trade.

Tellingly, contracts on the tech-tilted – and thus credit-sensitive – Nasdaq index are suffering outsized losses while cash-rich Dow Jones equivalents are nearly flat, with the catch-all S&P 500 straddling the middle ground. That may be flagging inflation and the follow-on Fed policy pivot as the worries du jour.

CRUDE OIL TECHNICAL ANALYSIS

Crude oil prices turned lower as expected, taking another step toward the formation of a bearish Double Top chart pattern. From here, a daily close below swing low support at 60.61 exposes the formation’s neckline at 57.25. Breaching that would complete the topping setup, implying a move below $47/bbl to follow.

Neutralizing near-term selling pressure probably demands a breach above the $66-68/bbl zone, confirmed on a daily closing basis. From there, the 38.2% Fibonacci expansionat 70.37 and the 50% threshold at 74.42 approximate subsequent layers of resistance.

Gold Price Forecast: Bitcoin Weakness Fueling XAU/USD Strength?

Gold continues to move higher despite post-FOMC rate bounce Bitcoin weakness may be driving flows into the yellow metal XAU/USD targets next level of resistance at the 1,900 mark

Gold prices have driven higher over the past week as the yellow metal shifted back into the market’s good graces. A wave of weakness in the US Dollar has helped put spot gold prices to highs last seen in January and February. Speculation is also growing over the link between gold and Bitcoin, as institutional investors are supposedly ditching the crypto asset for the yellow metal.

Despite the recent strength in Gold prices, Wednesday’s Federal Open Market Committee (FOMC) Minutes appeared to slow inflows as a shift in language hinted to an environment where Treasury rates would likely be higher. The modest downward pressure on gold stemmed from the suggestion that if the economic recovery continues at the current pace, discussing a taper of the balance sheet would become appropriate. Pulling back the balance sheet would likely precede a hike in rates, hurting gold.

However, Randal K. Quarles, Federal Reserve Vice Chair for Supervision and Regulation, stated Wednesday that a premature reaction to rising prices in the economy could work against the Fed. Mr. Quarles was referring to a pickup in inflation seen in the CPI figures released last week. That language is in line with the broader Fed narrative, which sees the rise in prices as a temporary phenomenon. Still, rate traders pushed yields higher across the curve, although the 10-year yield remains below its April high.

Another interesting narrative in gold markets – introduced to the mainstream thinking by analysts at JPMorgan – suggests institutional investors are moving into gold as they ditch the cryptocurrency. A correlation in price between the two assets appears to support that narrative to a degree. This could be, as some have mentioned previously, a fundamental shift where Bitcoin is replacing gold as a safe-haven store of value.

In fact, JPM remarked earlier this year that the scenario is possible, although it would be a process that takes years to achieve.

Unlike gold, however, crypto assets still face potentially threatening regulatory risks. That risk appeared earlier this week when the Chinese government regulators warned against financial institutions using Bitcoin for transactions. The move by China is likely to remain a near-term headwind for Bitcoin, along with other potential regulations from global governments.

XAU/USD VERSUS BITCOIN (BLUE LINE) DAILY CHART

GOLD TECHNICAL BREAKDOWN

Gold is trending higher, with eyes on the next major potential barrier at the psychologically imposing 1,900 level. XAU/USD’s technical posture brightened after the precious metal broke above channel resistance that was in place from the August swing high. A break over 1,900 may inject further bullish momentum into the commodity. Alternatively, a turn lower would have traders eyeing the recently broken resistance level to turn into a possible area of support.

GOLD DAILY CHART

Australian Dollar Analysis: AUD/USD Gyrates Following Mixed Jobs Data

Australian employment change comes in at -30,600 against a previous gain of 77,000

The Australian unemployment rate falls to 5.5%, however labor force participation also dropped AUD/USD pushed lower Wednesday following a wave of risk-off sentiment across all asset classes

Australian employment data largely disappointed on Thursday as total employment decreased by 30,600 jobs, against an expected gain of 15,000 jobs for April. Despite the miss, the country’s unemployment rate dropped to 5.5%, down 0.2% from March. Perhaps a green shoot in the reading was the gain in full-time employment, which grew in April by 33,800. Of note, the end of the domestic “JobKeeper” subsidy program will present a headwind to further significant employment gains.Experts labeled the program as a key factor in the sharp decline in Australian unemployment over the last 6 months.

AUSTRALIAN EMPLOYMENT TRENDS

Australian Dollar Analysis: AUD/USD Gyrates Following Mixed Jobs Data

Data courtesy of Australian Bureau of Statistics

Despite the significant improvement in economic conditions in Australia, Reserve Bank of Australia (RBA) officials remain adamant that interest rate hikes will not take place until employment and inflation quotas are met. RBA officials will pay serious attention to the changes in the labor market, particularly the decrease in labor force participation. Participation dropped from 66.3% in March to 66.0% in April. In RBA minutes released this week, officials hinted at a willingness to alter bond buying, but committed to no rate hikes until 2024.

The Australian dollar came under pressure Wednesday as FOMC minutes mentioned tapering of asset purchases, specifically the fact that multiple FOMC participants believe taper talk should take place over the next few meetings. Markets reacted immediately, with the US dollar catching an immediate bid on the news. Any significant strength in the Greenback may be enough to see AUD/USD break below the neckline of a head and shoulders (H&S) pattern that has been forming since late April. Currently, the neckline stands around 0.7700. For more on this H&S pattern, please click here for insight from Rich Dvorak.

AUD/USD 4 HOUR CHART

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