Crude oil and gold prices are likely to rise if the Federal Reserve opts to offset worries about a cutback in QE with a dovish change in forward guidance.
Talking Points
- Commodities to Rise if FOMC Opts for Dovish Shift in Forward Guidance
- Crude Oil, Gold Prices Hovering Above Near-Term Chart Support Levels
Financial markets have set their sights on the outcome of the Federal Reserve monetary policy announcement. Traders will look for confirmation of consensus expectations calling for the central bank to begin “tapering” the size of its monthly asset purchases in September. Officials have just the policy statement to convey their message to the markets this time and so are likely to select language that is as neutral as possible to limit scope for the kind of volatility that was seen after the June sit-down.
With that in mind, the market-moving bit of the announcement is likely to be the presence or absence of changes to the forward guidance component of the Fed’s policy mix. In this context, a dovish scenario will see the FOMC supplement familiar taper-related language with the introduction of a lower bound on inflation and/or a reduction in the threshold for the unemployment rate needed to be achieved before rate hikes enter the picture. That would cement policymakers’ intention to remain accommodative even as tapering commences.By contrast, a hawkish outcome would see policymakers abstain from changes to forward guidance.
On balance, a dovish outcome is likely to be supportive for cycle-sensitive crude oil and copper prices traders cheer on the prospect of lasting policy support for the world’s largest economy, particularly against a backdrop of lingering recession in the Eurozone and growing concerns about a “hard landing” in China. It will probably boost anti-fiat demand for gold and silver as well as investors consider the US Dollar dilution implications of a longer-lasting Fed accommodation. Needless to say, a hawkish result stands to produce the opposite dynamic.
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Crude Oil Technical Analysis (WTI) – Prices turned lower as expected. Sellers are now testing support at 102.70, the 38.2% Fibonacci retracement, with a break lower targeting the 50% level at 100.79. Near-term resistance is at 105.06, the 23.6% Fib.
Daily Chart – Created Using FXCM Marketscope 2.0
Gold Technical Analysis (Spot) – Prices put in a Bearish Engulfing candlestick pattern below resistance at the top of a rising channel set from late June, hinting a move lower is ahead. Channel bottom support is now at 1317.10, with a break beneath that initially targeting the 23.6% Fibonacci expansion at 1273.98. Near-term resistance is at 1347.57, the July 24 high, followed by the channel top at 13847.51.
Daily Chart – Created Using FXCM Marketscope 2.0
Silver Technical Analysis (Spot) – Prices are testing support at the bottom of a bearish Flag pattern (19.71), with a break downward on a daily closing basis targeting the 23.6% Fibonacci expansion at 19.03. Near-term resistance is at 20.59, the July 23 high, followed by the Flag top at 20.96.
Daily Chart – Created Using FXCM Marketscope 2.0
Copper Technical Analysis (COMEX E-Mini) – Prices broke support at the bottom of a bearish Flag continuation pattern and the 38.2% Fibonacci expansion (3.067), exposing the 50% level at 3.016. Alternatively, a reversal back above Flag bottom support-turned-resistance (3.091) eyes the 23.6% expansion at 3.130.
Daily Chart – Created Using FXCM Marketscope 2.0
— Written by Ilya Spivak, Currency Strategist for Dailyfx.com
