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Oil And Gold To Decline If FOMC Validates Hawkish Policy Turn Bets
Written by article default Wednesday, 27 April 2011 17:59
Commodities – Energy
Crude Oil Tracking Risk Trends into FOMC Announcement
WTI Crude Oil (NY Close): $112.21 // -0.07 // -0.06%
Prices continue to tread water below resistance at $113.44, the April 11 high, a barrier reinforced by support-turned-resistance at a rising trend line set from the lows in mid-February. A pullback from here sees initial support at $109.37, the 23.6% Fibonacci retracement of the 3/16-4/11 advance.
The WTI contract inched lower for a second day on Tuesday after crude inventories hit the highest in four weeks according to a report from the American Petroleum Institute. Looking ahead, all eyes are on the Federal Reserve as the rate-setting FOMC delivers its monthly policy announcement, which this time around will be followed by the inaugural quarterly press conference from Chairman Ben Bernanke.
The central bank chief is surely aware that public opinion is heavily skewed against the Fed’s ultra-loose policy posture – indeed, this press conference is a direct outgrowth of that awareness – so it seems likely that he will use the occasion to begin outlining stimulus exit plans. This threatens to weigh on economic growth expectations and risk appetite at large, pressuring crude lower as prices continue to follow broad-based sentiment trends (as tracked by the MSCI World Stock Index). Official DOE inventory figures as well as the US Durable Goods Orders report are also on tap.
Commodities – Metals
Gold May Decline on Hawkish Turn at US Fed
Spot Gold (NY Close): $1506.20 // -0.93 // -0.06%
Prices pulled back from resistance at the top of a rising channel set from late March to find interim support just below the $1500 figure. Continued selling from here exposes the channel bottom (now at $1480.78), a barrier reinforced by support-turned-resistance at $1476.45, the April 11 high. Resistance stands at $1518.35, the latest record high.
As with the spectrum of financial markets, the FOMC policy announcement and subsequent press conference are in focus over the next 24 hours. While benchmark borrowing costs will almost certainly remain unchanged, it seems logical to conclude that some sort of hawkish shift is likely. Indeed, as noted above, the Fed has little motivation to introduce press conferences into the policy mix now if not to offer something to repair its tarnished image among the US electorate; with public opinion set against QE, the only impetus to willingly expose the central bank to public scrutiny seems to be the presence of “good” news.
With that in mind, the key question now seems to be the degree of hawkishness allowed by Fed Chairman Ben Bernanke, with a removal of the promise to keep interest rates low for an “extended period” from statement accompanying the announcement being one clear signal of forthcoming tightening. A clear-cut pledge to cap QE2 at $600 billion and allow the program to expire in June would likely prove less potent, considering that much is already widely expected. On balance, a relatively hawkish outcome is likely to weigh on gold prices, pushing up yields and working against inflation expectations. Naturally, the alternative would be likely if a meaningful anti-stimulus gesture is not made.
Spot Silver (NY Close): $45.49 // -1.43 // -3.04%
Prices dropped to support at the midline of a rising channel set from late January – now at $44.58 – after putting in an acutely bearish Spinning Top candlestick at the formation’s upper boundary. Continued weakness from here exposes the channel bottom just above the $42.00 figure. Resistance stands at $47.21.
As with gold, all eyes are on the on the FOMC rate decision and its implications for yields and inflation expectations in the day ahead. The gold/silver ratio rose for a second day, yielding the largest daily increase in six weeks, to hint that silver’s recent outperformance may turn on its head to produce a steeper pullback than its more expensive counterpart should broad-based selling emerge in the precious metals space.
