Although there was previously some optimism that the oil bears might have finally dug themselves a floor when the selling seemed to pause just before the Christmas break, it was always possible that the pause in selling could have just been a consolidation before the next leg lower, and the oil markets hitting new five-and-a-half-year lows on Monday proved that to be the case. Moments ago, Brent fell to $54.82 with Crude at 51.31. The reason behind what could be the next leg lower? The economic conditions the oil markets face have not changed, which is eliminating buyers from even considering entering positions.
Despite the recent news that Iraq is planning on increasing production and Russia stating production has recently increased weighing on fears over an oversupply, the selling pressure also stretches elsewhere. For example, global economic concerns are not going to exit the picture anytime soon. There are also fears that China’s economic data will continue to slowdown during the opening months of the year. Bearing in mind that China is among the largest importers of oil, weak data from the economic powerhouse is only going to increase fears over reduced demand and maintain selling pressure. The selling in oil resumed shortly after the announcement that China manufacturing activity in December fell to a 2014 low, and I do not think this is a coincidence.
Although commodities like Oil have commenced the week by taking a fall, metals are yet to feel any heat. Gold has reached $1197, while Silver approached $16 before settling back down to around $15.80. US economic data is low in volume today, with this likely being why metals have shown some signs of buying pressure. With high risk US economic data such as the FOMC Minutes and NFP later in the week, we can expect increased market noise as the week develops. Any hawkish comments that the Federal Reserve could be set to raise interest rates before the middle of the year, or another impressive employment report, would likely inspire selling in metals.
Following a stunning start to the week where the EURUSD commenced the week by falling to a milestone low, the pair has attempted a small recovery. The EURUSD attempted a re-test of the 1.20 level but with this area being seen as a psychological level and the risk for the pair being strictly to the downside, the Eurodollar has quickly fallen back below 1.19 at the time of writing. All the attention is on the political situation in Greece, with the risk being that if an anti-austerity party gains control that it might encourage a ripple effect elsewhere in Europe. However, the divergence between monetary policy between the ECB and US Federal Reserve is ever-widening, and I think traders are entering the pair early to price in further declines.
After the GBPUSD opened trading by falling close to 140 pips, the pair attempted to re-enter the level of 1.53 before snapping all the way back to the low 1.52’s. The UK economic sentiment took its second blow in two trading days when the UK construction PMI followed the recent Manufacturing PMI and provided further evidence of domestic growth cooling down in the UK economy. The PMI was expected to drop to 59 from a 59.4, with the figure coming in at a lower 57. This is still a strong number and considering the UK housing market is losing momentum and we are inside the winter months it is not unheard off for construction to slow down. However, the lower-than-expected PMI provides further reason for the Bank of England (BoE) to push back interest rate pressure.
As mentioned earlier, the Sterling bears are taking advantage of a combination of different factors to push the GBPUSD down from 1.55 to 1.51 in less than two days. For example, it is almost certain that the BoE are going to leave interest rates unchanged this Thursday. The BoE’s increasingly dovish outlook on inflation is pushing back expectations for the BoE to raise rates, which is weakening investor attraction towards the Sterling as a result. Not only is the BoE’s stance on raising interest rates becoming more neutral, but the general election taking place this coming May is now at the forefront of investors’ attention.
Overall, with the BoE becoming neutral towards a rate rise and the general election in May providing the potential to spook investors in the same way the Scottish Referendum did, there is limited opportunity for Sterling bulls to charge forward. The bulls’ strongest chances of progressing to the upside rest upon USD weakness but with US GDP growing at an annualised 5% only reaffirming US interest rate expectations, it would take something rather unexpected for widespread USD weakness to be around the corner.
Written by Jameel Ahmad, Chief Market Analyst at FXTM.
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