Metals come under attack, Gold drops below $1180

The increasingly positive outlook for higher US interest rates next year led to metals coming under heavy fire on Monday. Gold dropped to its lowest level in over two weeks at $1170.52, while Silver declined by nearly 3% before finding support at $15.50. The Federal Reserve provided reassurances to investors last Wednesday that it will begin raising US interest rates during the upcoming year, with this encouraging a stronger USD and underpinning a longer-term bearish view on metals. Confirmation of US GDP expanding at a level beyond an annualised 4% on Tuesday would likely further strengthen US interest rate expectations and add more pressure on metals before the financial markets close for Christmas.

The EURUSD made another attempt at recovering losses on Monday, by aiming to re-enter 1.23 before tumbling back down to conclude trading at 1.2216. The divergence of economic sentiment between the US and Europe is looming largely, leading many to assume this pair will continue to fall moving forward. Now that the Federal Reserve has provided investors with reassurances it will begin raising rates next year, USD demand will remain consistent – meaning the EURUSD bulls’ best chances of moving to the upside are fading. Meanwhile repeated indications that the European Central Bank (ECB) will need to do more to help the EU economy is just spelling out to traders the longer-term bearish outlook for the pair.

The GBPUSD is continuing to move lower, with the pair falling below 1.56 as expected on Monday. The GBPUSD concluded trading at 1.5589, erasing nearly all gains recorded from last Thursday’s impressive retail sales performance. Although the retail sales data provided further evidence of the UK’s strong fundamentals, the Bank of England’s (BoE) extremely dovish outlook on inflation is pushing back interest rate expectations and dampening investor attraction for the GBP. Subsequently, this is strongly limiting GBP bulls’ chances of advancing to the upside. Tuesday sees confirmation of UK GDP released but with traders aware the BoE will not be raising rates regardless of how potentially strong the GDP figure is confirmed, the data may be greeted with a bearish response from investors.

After the oil markets attempted to rally early on Monday morning, both Brent and Crude spend the remainder of Monday erasing gains. Brent fell from $62.92 to $59.82, while Crude reached $57.34 before settling down to $55.38. The increased volatility in the oil markets have been inspired by some contradictory comments by Saudi Arabian Oil Minister, Ali Al-Naimi. The oil minister provided the bulls with an excuse to rally by suggesting prices would rebound as economic growth boosts demand, then later unsettling investors by suggesting OPEC would not cut production regardless of how low prices fall.

Personally, I see the idea that prices will rebound as economic growth boosts demand as simply flawed because there are valid concerns around the global economic recovery at present. If it wasn’t for the Federal Reserve calming investors down by reassuring last Wednesday evening that it will begin raising interest rates next year, the sudden financial market sell-off last week could have easily been extended for longer. Global economic growth forecasts continue to be downgraded and fears over the global economy are catching major news headlines on a regular basis, which will heighten anxiety over an oversupply of oil in the markets. The fundamental concerns over an oversupply are not going to evaporate anytime soon, and this is largely why oil bulls are struggling.

What I think might be currently happening is that the oil markets could be entering a consolidation phase, before the next potential leg lower. The bears have dug below such a wide variety of psychological support levels over recent weeks, they are likely trying to determine whether they can continue digging lower. Economic data is low during the Christmas period, so this would explain why the oil markets are possibility consolidating right now. There is some optimism prices might have found a floor, but this potential floor needs to be tested further before we can be more sure of it.

Questions over the global economy are likely to resume at a later date and provide the current support levels with a challenge. We will only know if a possible floor has been located if Brent refuses to budge below $58.49 with Crude also refusing to edge lower than $54.30 and right now, these levels haven’t been challenged enough.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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