Oil – An even smaller consolidation before a break lower

After a tiny bounce higher last Wednesday and Thursday, there was some optimism that the oil markets may have been attempting a recovery. This optimism was highly premature, and premature it turned out to be when bearish momentum resumed in the markets on Friday. Both Brent and Crude declined by around $2, with Brent falling to a new low at $48.88 and Crude sliding down to $47.14. The economic conditions that the oil markets face have just not changed, and are unlikely to change anytime soon. The overpowering supply and demand equation is heavily-weighted in favour of the bears, which is allowing them to continually block the bulls from making any counter moves.

Ultimately, with the oil markets continuing to attract headlines and record significant moves, this makes it is extremely likely that this lengthy period of high market volatility will continue in the near future.

The major economic announcement on Friday was the latest US jobs report, where the US economy added another impressive 252,000 jobs to its economy. The market reaction to the USD was largely mixed when the data was announced, however as trading began to conclude the USD started to decline against its counterparts. Why would the USD decline following another strong jobs report? There are a couple of possible reasons for this.

Firstly, there was some anxiety over the 0.2% decrease in wage growth from the previous month possibly delaying the Federal Reserve from raising interest rates. Whereas in my opinion, traders are just under the assumption that although April has been offered as a possible timeframe for the Federal Reserve to commence possible rate hikes, this still appears a bit sooner-than-expected and traders could be using this as an opportunity to buy the USD in dips. Finally, it is also possible that the pressure on global stocks following the substantial drop in oil at the beginning of the year finally caught up with the USD.

Gold benefited from the USD weakness, with the yellow metal managing to appreciate to its highest level since the 11th November at $1230. If it is the pressure on global indices following the drop in oil prices weighing on the USD, then it is possible for Gold to continue making some moves higher. However, the $1238 level represents the 50.0 fib from the previous high to the previous low and was seen In November as resistance for Gold.

Another reason which leads me to see the pressure on global stocks as the possible reason for the USD decline, is the resumed demand for the JPY. On the past three occasions the decline in oil has weighed on global stocks, demand for the JPY has increased and we have seen the same thing happen this morning. The USDJPY has pulled back to 118.094, with this roughly being the same level as we witnessed when demand for the JPY increased in December.

After reaping the rewards from some USD weakness on Friday afternoon, the GBPUSD has already declined by over 50 pips on Monday morning. The pair has dropped to 1.5123, and appears to be on its way to 1.50 once again. The lack of investor attraction is continuing to weigh on the Pound, with Tuesday’s annualised inflation data for December widely being seen as a potential major downside risk for the currency. The primary fear is that this could be the month when UK annualised inflation levels drop below an annualised 1%, which would inevitably strengthen the Bank of England’s (BoE) already dovish views on inflation levels and push expectations for a UK rate rise even further back.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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