Crude Oil, Gold to Rise if FOMC Downgrades QE Taper Risk

DailyFX

Crude oil and gold prices are likely to rise if the Federal Reserve pours cold water on expectations of a near-term reduction in the size of QE asset purchases.

Talking Points

  • Fed Policy Announcement in Focus as Traders Await “Taper” Guidance
  • Crude Oil, Gold to Rise if FOMC Downgrades Stimulus Reduction Risk

The Federal Reserve monetary policy announcement is in focus. Traders are looking to the outing as a defining moment when the FOMC unveils critical guidance on the timing of a reduction in QE3 asset purchases and the strategy to be used to execute it.

Ben Bernanke and company have surely taken note of the uneasy mood around financial markets associated with a possible near-term stimulus cutback. In fact, central bank officials have floated the idea of tapering QE in commentary over recent weeks, suggesting they may have been deliberately stress-testing investors’ likely response to such an outcome.

With that in mind, today’s outing may be used as an opportunity to assuage fears of a rush to remove policy support. Central themes could include the acute data-dependence of the current policy framework, whereby the size of QE can be adjusted in either direction given the still-fragile labor market as well as a recent slide in priced-in inflation expectations. Rhetoric striking a clear contrast between reducing asset purchases and outright tightening may also feature prominently.

On balance, an FOMC outing that is perceived as broadly dovish is likely to boost risk appetite, offering support cycle-sensitive commodities including crude oil and copper. In the precious metals space, gold and silvermay likewise find support as the US Dollar declinesagainst most of its G10 FX counterparts. Indeed, most of the greenback’s top pairings have been primarily driven by relative policy expectations in recent months.

Crude Oil Technical Analysis (WTI)- Prices cleared falling trend line set from late January and the 50% Fibonacci expansion at 97.09, exposing the 61.8% level at 98.47. A further push above that eyes the 76.4% Fib at 100.18. The 97.09 mark has been recast as near-term support, with a reversal back beneath that eyeing the trend line (now at 96.56) anew.

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Commodities_Oil_Gold_to_Rise_if_FOMC_Downgrades_QE_Taper_Risk_body_Picture_3.png, Crude Oil, Gold to Rise if FOMC Downgrades QE Taper Risk

Daily Chart - Created Using FXCM Marketscope 2.0

Gold Technical Analysis (Spot)- Prices edged past support at a rising trend line set from mid-April to challenge the 38.2% Fibonacci expansion at 1366.43. A break below that exposes the 50% level at 1348.74. A move back above trend line support-turned-resistance (now at 1374.70) eyes a downward sloping barrier at 1395.72.

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Commodities_Oil_Gold_to_Rise_if_FOMC_Downgrades_QE_Taper_Risk_body_Picture_4.png, Crude Oil, Gold to Rise if FOMC Downgrades QE Taper Risk

Daily Chart - Created Using FXCM Marketscope 2.0

Silver Technical Analysis (Spot)- Prices took out support at the 38.2% Fibonacci retracement (22.03) to expose the 50% level at 21.17. A further push beneath that aims for the 61.8% Fib at 20.31. Alternatively, a move back above 22.03 aims for the 23.6% expansion at 23.10.

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Commodities_Oil_Gold_to_Rise_if_FOMC_Downgrades_QE_Taper_Risk_body_Picture_5.png, Crude Oil, Gold to Rise if FOMC Downgrades QE Taper Risk

Daily Chart - Created Using FXCM Marketscope 2.0

Copper Technical Analysis (COMEX E-Mini)- Prices broke support at 3.241, the 23.6% Fibonacci expansion, after putting in a bearish Evening Star candlestick pattern. Sellers now target the 38.2% level at 3.132, with a further push beneath that eyeing the 50% level at 3.044. Alternatively, a reversal back above 3.241 aims for the May 8 highat 3.398.

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Commodities_Oil_Gold_to_Rise_if_FOMC_Downgrades_QE_Taper_Risk_body_Picture_6.png, Crude Oil, Gold to Rise if FOMC Downgrades QE Taper Risk

Daily Chart - Created Using FXCM Marketscope 2.0

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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