Oil weathers the FOMC storm
Oil’s strong fundamentals continued to support prices and limited post-FOMC losses overnight. Futures markets remained in backwardation, signaling strong physical demand, and official US Crude Inventories fell by an above expected 7.355 million barrels overnight.
Brent crude tested USD75.00 a barrel overnight before retreating on the FOMC surprise and finishing 0.50% lower for the day at USD73.85 a barrel.
WTI tested USD73.00 a barrel before suffering a similar fate, finishing just 0.10% higher at USD71.70 a barrel. Prices were hardly changed in Asia, with both contracts rising 0.10% as markets digested the implications of the FOMC meeting outcome.
However, although oil’s fundamentals remained firm, both contracts were now vulnerable to a potentially sharp downward correction to cull excessive speculative longs in the shorter term, especially if we are about to see a period of US dollar strength.
The Relative Strength Indexes (RSIs) on both contracts have remained in overbought territory. The daily RSI is usually a good indicator of intra-trend corrections when it reaches extreme levels.
Brent crude still has USD75.50 and USD78.00 in its sights, but a fall through USD72.80 could signal a drop extending as far as USD71.00 a barrel. WTI has resistance at USD75.50, and failure of USD71.00 could see USD70.00 a barrel retested. Any abrupt sell-off is likely to be violent but short in duration.
Gold crushed under the foot of the FOMC
Gold was crushed overnight by a more hawkish FOMC, leading to fears that US bond yields would rise. Gold fell by over 2.50%, carving through its 200-day moving average at USD1840.00, highlighting the extent of speculative long positioning in the market. It also highlighted gold’s sensitivity to a higher US dollar and US rates.
Gold staged a modest recovery in Asia, rising USD9.00 an ounce to USD1822.00 an ounce, but the rally looked more like speculative dip buying and fast money short-covering than a vote of confidence in the yellow metal.
This morning’s minuscule recovery by gold should be approached cautiously, as we have yet to see how a change in tone from the Federal Reserve will fully play out in markets.
Gold’s next critical support is the 100-day moving average at USD1797.50. A daily close below there will signal a deeper correction is in the prospect that would initially target USD1760.00 an ounce. Resistance lies at its 200-DMA today at USD1839.50 an ounce. Gold will likely gyrate in a choppy range between USD1815.00 and USD1825.00 over the Asian session.