Oil, Gold Vulnerable to Disappointing ECB Rate Decision

DailyFX

Crude oil and gold prices may decline if a half-hearted stimulus effort from the ECB fails to boost risk appetite and reignite anti-fiat demand.

Talking Points

  • Crude Oil, Copper May Fall if ECB Rate Decision Fails to Boost Risk Trends
  • Gold and Silver at Risk if ECB Opts Against Non-Standard Stimulus Measures

Commodity prices are treading water in overnight trade as all eyes turn to the European Central Bank monetary policy announcementamid widespread speculation about a 25bps interest rate cut to address the region’s deepening recession. Taken together, the Eurozone is the world’s second-largest economy and currently the sickliest of the major engines of global output, seemingly making the introduction of added stimulus there a supportive development for risk appetite.

A reduction in the benchmark lending rate alone without an accompanying QE-like non-standard stimulative effort may fail to impress investors however. The market rate to borrow Euros overnight has averaged around 0.1 percent over the past 12 months. That means cutting the ECB benchmark lending rate from 0.75 to 0.5 percent would be essentially moot in terms of lowering regional borrowing costs. Meanwhile, a Bloomberg index tracking Eurozone financial conditions has shown slow deterioration since late January, underscoring the inability of low rates by themselves to secure a supportive funding environment.

With this in mind, cycle-sensitive crude oil and copper prices may not find lasting support even if the ECB opts to deliver a rate cut. Gold and silver may likewise face selling pressure in the absence of more significant liquidity-expanding program that is at least introduced into the near-term outlook if not implemented outright. Such a scenario would do little to advance fiat dilution concerns, undermining demand for assets seen as an alternative store of value.

WTI Crude Oil (NY Close): $91.03 // -2.43 // -2.60%

Prices turned lower after completing a bearish Dark Cloud Cover candlestick pattern, taking out the 23.6% Fibonacci expansion at 91.82 to challenge the 38.2% level at 90.06. A further push beneath that aims for the 50% Fib at 88.64. The 91.82 mark has been recast as near-term resistance, with a turn back above that eyeing swing highs in the 94.66-79 area.

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Commodities_Oil_Gold_Vulnerable_to_Disappointing_ECB_Rate_Decision_body_Picture_3.png, Oil, Gold Vulnerable to Disappointing ECB Rate Decision

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1457.58 // -19.17 // -1.30%

Prices are consolidating below resistance at 1487.65, the 61.8% Fibonacci retracement. Near-term support is at 1455.94, the 50% level, with a break below that targeting the 38.2% Fib at 1424.23. Alternatively, a move above resistance aims for the 76.4% retracement at 1526.88.

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Commodities_Oil_Gold_Vulnerable_to_Disappointing_ECB_Rate_Decision_body_Picture_4.png, Oil, Gold Vulnerable to Disappointing ECB Rate Decision

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $23.63 // -0.70 // -2.89%

Prices recoiled from resistance at 24.49, the 23.6% Fibonacci retracement. Near-term support is at 23.55, the 14.6% Fib, with a drop beneath that eyeing the April 16 bottom at 22.03. Alternatively, a reversal above resistance targets the 38.2% level at 26.02.

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Commodities_Oil_Gold_Vulnerable_to_Disappointing_ECB_Rate_Decision_body_Picture_5.png, Oil, Gold Vulnerable to Disappointing ECB Rate Decision

Daily Chart - Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.080 // -0.108 // -3.39%

Prices are testing support at 3.046, the October 3 2011 close. A break below that targets the 3.000 figure and the major October 4 2011 swing low at 2.930. Near-term resistance is at 3.153, the 23.6% Fibonacci retracement, with a push above that initially aiming for the 38.2% level at 3.210.

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Commodities_Oil_Gold_Vulnerable_to_Disappointing_ECB_Rate_Decision_body_Picture_6.png, Oil, Gold Vulnerable to Disappointing ECB Rate Decision

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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