– Gold’s symmetrical triangle, previously eying topside resolution, has failed and broken to the downside.
– Sentiment for the US Dollarhas started to turn contrarian bullishmidway though Q2’18.
For longer-term technical and fundamental analysis, and to view DailyFX analysts’ top trading ideas for 2018, check out the DailyFX Trading Guides page.
Gold prices broke below their March 1 swing low at 1302.68 today, setting up a break to fresh 2018 lows and a break of the symmetrical triangle in place since mid-January all in one fell swoop.
Concurrently, the break of the uptrend from the December 2016, July 2017, and March 2018 has now definitely broken to the downside, after the failed return to the trendline last week. Now, bearish momentum is accelerating, with Gold prices below their daily 8-, 13-, and 21-EMAs, and both MACD and Slow Stochastics trending lower in bearish territory.
Gold Price: Daily Timeframe (September 2016 to April 2018) (Chart 1)
What has been the catalyst to this break lower by bullion? A stronger US Dollar on the back of higher US Treasury yields (both nominal and real) has paved the way for lower Gold prices.
Gold Price versus US Real 10-year Yield: Daily Timeframe (May 2017 to May 2018) (Chart 2)
Presently, rising US real yields means that the spread between Treasury yields and inflation rates are increasing. If Gold yields nothing, has an estimated cost of carry of -2.4%, and only can return capital appreciation, it faces a difficult situation when US real yields rise.
That is, gold’s appeal as an inflation hedge relative to the US Dollar increases not in an environment when inflation is just rising, but when inflation is rising and nominal interest rates are not rising at the same pace; or in sum when US real interest rates are dropping. This has not been the case.
Currently, the 50-day correlation between Gold prices and the US real 10-year yield has reached its strongest negative correlation since the end of November 2017. That’s to say that as US Treasury yields continue to push higher, assuming inflation stays at its same rate or drops, then US real yields will continue to rise, undercutting Gold’s price even further.
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Top Tier Data, Risk Aversion Portend Volatility
Financial markets may face breakneck volatility as a steady stream of heavy-duty scheduled event risk is compounded by wild swings in sentiment.
The US Dollar may continue to push higher as haven demand amid deteriorating market sentiment takes over from Fed policy bets as the catalyst du jour.
There is an argument to be made that Sterling has suffered enough and that most, if not all, of the bad economic backdrop has been priced in. But is next week the week to have that argument?
The Australian Dollar faces a week full of US economic data, but much shorter of domestic numbers. This could see USD back in the ascendant, if only for lack of AUD-specific impetus.
Chinese Yuan Forecast: Yuan May Benefit from Capital Inflows, Trade Talks and Chinese PMI
Capital inflows could remain high around June 1, when A shares are officially included in MSCI indices; trade talks may solve some discrepancies; PMI gauges could boost the outlook of a sustainable recovery.
Crude oil hit a wall as OPEC and its allies are said to increase production while total US inventories swelled by the most since February.
Equities Forecast: S&P, Dow, DAX & FTSE – A Cautionary Pause Begins to Show
See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.
See how retail traders are positioning in the majors using the IG Client Sentiment readings on the sentiment page.
Euro Moving Towards Key Support to Curb Persistent Selling
EUR/USD TECHNICAL HIGHLIGHTS:
- EURUSD selling shows no signs of abating, close below Jan 2017 trendline sets up further weakness
- Key risk events on the calendar come in the form of Eurozone inflation and US NFP report
For the intermediate-term fundamental and technical outlook on EUR/USD, check out the recently released DailyFX Quarterly Forecast.
The theme of selling EURUSD has shown no signs of abating with the pair now trading around the mid-1.16 area. Last week saw the trendline dating back to January 2017 offer some mild support on Wednesday, however, another bout of Euro weakness saw the trendline support ultimately breached. A close below the trendline could provide a telling sign that another leg lower will be in store for the pair.
As we look ahead to next week, risk events on the calendar for the Euro will come in the form of the Eurozone inflation and the latest US NFP report. In terms price action, the aforementioned breach of the Jan’17 trendline sets up run in on the 2016 high situated at 1.1616, while a weekly low from November 7th at 1.1553 looks to be pivotal, a break below will likely see an extension of the bear run. Resistance on the topside resides at 1.1709, marking the 38.2% Fibonacci Retracement of the 1.0340-1.2556 rise, alongside 1.1750 (May 24th high).
EURUSD bulls on the longer term may find comfort in the fact that the Relative Strength Index on the daily chart is in oversold territory, which could indicate that the pair may see a modest reversal in the near-term. However, when the pair has previously been in oversold territory the rebound has been mild at best and followed by another wave of selling.
EURUSD CHART: DAILY TIMIE-FRAME (Sep 16-May-18)
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Crude Spills on Saudi’s Proposed Increase, Short-Term Top Likely
Fundamental Forecast for USOIL: Neutral
- The ONE Thing:Saudi turning on the spigots may lead to lower prices, but bullish environment remains. OPEC rhetoric is rightly center stage as oil traded notably weaker toward week’s end. Saudi Arabia’s oil minister, Ali-Falih, said he sees a ‘likely’ oil supply boost in H2 2018.
- Per BHI, U.S. Oil Rig Count rises to 859, US total count at 1059
- Crude Oil Price Forecast: Brent Premium Favors OPEC Induced Volatility
- The technical analysis picture of crude oil shows a sharp pullback off 3-year highs. Chart support comes in for the WTI front-month contract at $67.50/$64.50 per barrel.
Crude had the first weekly decline for the month of May as OPEC’s comments spooked bulls. More oil coming out of Saudi & Russia is helping to narrow a popular futures calendar spread that helped to visualize the bullish support for crude that weakened this week.
Shortage Fears Wane on OPEC+ Rhetoric
Data source: Bloomberg
Seemingly bearish rhetoric took hold of the Oil market causing the price to fall on Friday. Multiple reports came about OPEC, and their allies that are collectively known as OPEC+ as rolling back production cuts. There remains uncertainty about Venezuelan and Iranian supply that has likely supported these comments from OPEC+.
The front-month WTI crude contract broke back below $70 and calendar spreads between December 2018 to December 2019 futures contracts narrowed to the weakest levels in more than a month. The wide spread aligned the move above key resistance levels.
Additionally, owners of oil producer equities are likely not as concerned as an exposed futures traders given that many producers have been locking in high prices through hedging via options.
Crude has nearly erased May’s Gains With ~3.5% Drop Last Week
Data source: Bloomberg. Created by Quasar Elizundia
Once again, WTI and Brent crude has become the market everyone is discussing! Unlock our forecast here
Big Pullback on 240-Minute Chart
Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT
The sharp pull-back is seen well with RSI(5) on the four-hour chart. The RSI(5) has hit the lowest point since crude began its impressive ascent from $58/bbl in February to above $72/bbl earlier this week.
Since the news came that Saudi and Russia are considering easing global output cuts, the price dipped aggressively lower. Oil has its first weekly loss for the month on Friday’s nearly 3% loss.
Traders can look to trendline support zone and prior structure support points near $64.50/67.50 as likely support on the pullback. A deeper move below this zone would shift me from neutral to cautiously bearish, but the broader cycle change favoring commodities makes this a difficult view to hold.
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Next Week’s Data Points That May Affect Energy Markets:
The fundamental focal points for the energy market next week:
- Monday: US Memorial Day
- Monday: Statistics Norway releases quarterly survey on planned investments in the oil industry
- Wednesday (delayed for holiday) 04:30 PM ET: API Weekly Oil Inventories Report
- Thursday (delayed for holiday) 11:00 AM ET: EIA issues weekly US Oil Inventory Report
- Thursday 12-2pm: EIA releases monthly report
- Friday 1:00 PM ET: Baker-Hughes Rig Count
- Friday 3:30 PM ET: Release of the CFTC weekly commitments of traders report on U.S. futures, options contracts
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