The oil recovery story has continued with the WTI contract popping above the $80 mark. Following the OPEC+ meeting earlier this month, oil slid to $72.50 per barrel as the cartel outlined a phasing out of voluntary production cuts. However, over the last couple of weeks, energy markets have shrugged off these supply-side effects and instead focused on some optimistic indicators on the demand side of the equation.
Lower US inflation readings last week proved to be a plus, whilst this week we have seen good retail sales figures from China. Add into the mix an expectation for high energy demand stemming from the northern hemisphere Summer season and two ongoing conflicts in and around oil producing regions, and we now have oil again staring at upside risks. Levels to watch for the WTI contract include resistance at $81.06, while support sits at $78.67 and $77.05
Overnight in the US, softer retail sales data pulled treasury yields lower which proved advantageous for the gold price. While gold did make a move higher, the precious metal is in rangebound mode for the time being with financial markets still trying to figure out when that long awaited FOMC rate cut may be delivered. There is support for gold waiting at $2299, while resistance awaited at $2341 and then again at $2351.
Central bank buying of gold took a breather in May and any continuation of this trend poses a risk to the pace of upside momentum in the gold price. Gold will have a lower opportunity cost when US interest rates finally start to reduce, so on a medium to longer term horizon the outlook for gold remains constructive. Though in the short term, gold may settle into a range until US macro data provides a clearer picture of when the FOMC may act (to cut rates). During Asian trading hours today, spot gold was trading around $2329. Muted bond yields are enabling gold to consolidate gains, though a still-elevated greenback (i.e. USD) is capping the upside.
The Dollar Index (DXY) held firm despite the fall in treasury yields on the back of weaker retail sales data. The DXY is hovering around 105.30. The reason the USD is riding high is because the FOMC may be among the last central banks to pull the trigger on a rate cut, which means that the yield advantage that the ‘Buck’ (i.e. USD) enjoys looks set for an extended stay.
Except perhaps against the AUD. The RBA meeting this week illustrated that rat cuts are not likely in the near future and in fact, a rate hike remains a possibility should CPI continue to accelerate as it has done for much of 2024 so far. The hawkish tilt from the RBA sent the AUDUSD rate higher to above the 0.6650 level.
Elsewhere in FX, the USDJPY rate is approaching the 158 level again, which could be causing some nerves for BOJ officials. The 160-level proved to be the line in the sand for Japanese officials last time round as far as intervention was concerned. We could soon find out if Japanese officials have both the willingness and the weapons to defend this level if yen weakness continues.
