The October rebound for the USD has continued. The Dollar Index (DXY) is up around 2.6% this month, fuelled by a repricing of interest rate expectations following strong macro data points in recent weeks (e.g. jobs and CPI data beat expectations). The Dollar Index closed out last month struggling to keep its head above the 100 level. However, the U-turn staged by the greenback in October has resulted in the DXY ascending past the 103 level now that thoughts of any further jumbo-sized Fed rate cuts have fallen by the wayside. Over the past week we have also heard several Fed officials preaching a message of caution on further rate cuts, which has supported the USD from a yield differential perspective. This is particularly so against the likes of the euro, with the ECB expected the deliver a quarter of a percentage point cut this week (Thursday).
The USD rally has effectively slowed the momentum of the gold market, with the precious metal getting rather used to trading in the $2600-$2650 range this month. Gold came under selling pressure last week due to rising treasury yields and a stronger Dollar, however support levels around $2600 held. The shallowness of the pullback may be interpreted as a sign that price dips are being viewed by traders as buying opportunities for gold.
During Asian trading hours on Wednesday, gold was flirting with a moderate resistance level at $2663 having taken advantage of the USD easing mildly from its recent highs. On the upside, a second resistance level awaits at $2678 which would need to be breached for gold to have another run at $2700. Though a pullback in the USD and/or treasury yields might be required for this in the absence of increased safe haven demand (a situation which could see gold and the USD/treasury yields rise in tandem). Support levels for gold appear at $2630 and $2600.
The oil market has been anything but rangebound this month, with the WTI price having a nearly $12 range, such has been the erratic nature of crude in response to the Israel-Iran conflict. Oil slumped 4% overnight as risk premium was removed from the price on suggestions that Israel may not target Iran’s oil infrastructure and may instead strike military targets. Energy market pricing remains very much headline-driven and because of this, support and resistance levels do lose some relevance due to the large price swings that have been on display. Meanwhile, OPEC downwardly revised its projections for global oil demand this year and next, which didn’t do the crude price any favours either. Overall, the oil market is presenting trading opportunities given the large price movements but it’s a difficult one to forecast given uncertainty over Israel’s next actions. Because if Iran’s oil infrastructure were targeted this would have potentially large ramifications for not only oil but global markets. But for now, it’s a waiting game.
Looking ahead, US retail sales data this week could impact market expectations for the remaining Fed meetings this year, particularly if we see any sort of upside surprise as this could raise the odds of a Fed rate ‘skip’ occurring. Elsewhere, Friday will see a large batch of Chinese macro data released including GDP and retails sales figures. Recent inflation and trade balance data from China didn’t paint a very good picture of the economy (with both missing forecasts to the low side). If we see another batch of disappointing China data this could test the patience of investors who remain cautious on China in the absence of a specific fiscal package being delivered.
