Oil markets pressured ahead of OPEC

Both Brent and Crude Oil have continued to feel pressure ahead of Thursday’s highly anticipated OPEC decision, with Brent dropping to $77.97 and Crude to $73.63 on Wednesday. Although there was previously optimism that a cut in production would be agreed, this optimism is quickly fading today. Saudi Arabian Oil Minister Ali Al-Naimi has repeated that Saudi Arabia will not be willing to cut production, and added that no-one else should either. This news has since been followed by reports that Mexico, Russia and Venezuela are all against a cut in production.

If no one cuts production, it strongly suggests that the Oil markets are set to continue trading in a bearish direction in the longer term. A cut in production would provide some stability to the markets in the short-term but the longer term outlook would depend on who exactly is willing to cut Oil and for what duration. Even if a cut in production is the outcome on Thursday, the general consensus is that it would require a 1.5 million barrel-a-day production to stabilize the Oil markets. Anything less than a reduction of around 1.5 million barrels per day would likely result in investors continuing to view Oil as a selling opportunity.

Elsewhere, the EURUSD is trading in a narrow 20-30 pip range for the second European trading session in a row. Although there has been a reduced amount of economic data so far today, the reduced volatility is far more likely to be linked to caution remaining among investors as they weigh up whether the European Central Bank (ECB) will act next week. Recent comments from the OECD that the Eurozone “may be stuck in a persistent stagnation trap” is likely to underpin pressure on the ECB to increase stimulus.

Volatility in the GBPUSD has also been restricted to a narrow 40 pips, where the majority of market activity only occurred when the UK economy was confirmed as having expanded by an annualised 3%. Following the announcement, the Cable slipped to 1.5678 before quickly recovering to bounce back to 1.57 again. The short decline in the Cable was not linked to a disappointing economic performance, but a realisation among investors that the Bank of England (BoE) will not be raising rates.

The main takeaway from the UK GDP data is that although UK consumption is on the rise, exports are decreasing. This undershoots that the UK economy is exposed to the “global economic headwinds” elsewhere that Governor Carney warned as far back as August. If exports continue to slide, it also provides validity to the BoE’s suggestions that UK economic momentum will slow as the year concludes. The UK economy likely entering a weaker period of growth in Q4 will further limit investor attraction towards the GBP. At the time of writing, the GBPUSD has currently found some resistance around 1.5740 and whether the pair can extend above later today will be dependent upon whether investors take profit on the USD after the Durable Goods release this afternoon.

The USDJPY has continued to look lower for the second day running, but this downside move shouldn’t necessarily be attributed towards USD softness. The Bank of Japan (BoJ) Minutes release in the early hours of Tuesday morning announced that the vote to increase QE was extremely close, and split between 5-4. This has encouraged investors to close positions because not only does it appear that the BoJ are far less dovish than their move to expand QE by nearly 30% would suggest, but it also points to this increased stimulus measure being a one-off move, rather than the start of a regular easing cycle.

After extending below the critical 0.8540 support level yesterday, the Aussie has since dropped as low as 0.8479 and is at its lowest level since July 2010. After approaching the 0.8540 support level, Deputy RBA Governor Phillip Lowe took a page out of the book of RBNZ Governor Graeme Wheeler and used verbal jawboning to send the pair through its critical support. From a technical standpoint, dropping below support at 0.8540 made the pair look weak and it has remained no hidden secret that the Reserve Bank of Australia (RBA) have spent the majority of the year pushing for a weaker currency.

Investor attraction towards the Aussie deteriorated when the recent RBA minutes unexpectedly suggested the central bank may need to cut interest rates, but the sentiment towards the Aussie flattened following Lowe’s comments that the Aussie is set to decline in line with commodity prices. Wednesday’s early morning news from Australia that Construction Work has declined by 2.2% has placed further pressure on the local economy. With Australia already under the spotlight for attempting to build a domestic focus, as long as there is no sudden “risk on” attitude from investors, we are looking at the potential for the Aussie to continue drifting lower from here.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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