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USD bulls receive a blow – Oil markets pull back

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It has been continuously reiterated since the end of last summer that despite heightened expectations, the Federal Reserve will be in no hurry to begin raising US interest rates and yesterday evening’s FOMC minutes highlighted exactly this. The FOMC minutes release was pretty explicit in pushing back interest rate expectations until the second half of this year with central bank policymakers expressing concerns regarding slow wage growth, weakening inflation expectations and international developments outside of the United States. As a result of the more dovish tone USD bulls received a blow, which resulted in the greenback weakening and metals like Gold and Silver receiving some breathing space after experiencing bearish pressure over the past few days.

The weakening USD allowed Gold to rebuild some momentum and the yellow metal has now bounced higher to $1217 after extending to a near six-week low at $1197 in the lead up to the FOMC minutes release. Silver also managed to mount an escape from a five-week low at $16.25 to extend to $16.71. Although the USD bulls received a blow with the tone of the FOMC minutes, I do not think the USD softness will be widespread or become a longer-term trend. The minutes just finally provided clarity and ended continuous speculation that the Federal Reserve will be raising interest rates in the next few months. The general consensus is that the second half of the year is still achievable, with myself still viewing September as a likely time frame.

Volatility in the oil markets was high yesterday, with both WTI and Brent Crude encountering losses and pulling back by around $3 each. Brent Crude slipped from a near two-month high at $62.97 to extend as low as $59.23 while WTI declined from $53.39 to consolidate just above $50 at $50.32. The reason for the sudden erasing of recent gains could be linked to the probability that the US Crude Inventories data to be released later this afternoon will not only show that US inventories are increasing beyond expectations, but also reaching record highs.

For the past two weeks US Crude Inventories have been announced far above forecasts, which has rekindled concerns over the aggressive oversupply of the commodity in the markets and there is a chance traders are getting in early by already pricing in a decline. The over-supply concerns are still extensive and it is not just US crude inventories that are driving them, possible rises of output from Saudi Arabia and Russia are also being reported. I do feel that the oversupply issues are so severe that the oil markets will always be at risk of a sudden pullback like we saw just yesterday, unless a substantial decline in production is noticed.

That being said, there is no doubting investor sentiment towards the commodity has changed over recent weeks. After losing over 50% of its value in over just a couple of months, arguments that it was heavily oversold are valid. Nonetheless, being able to recover around 20% of these losses when the economic conditions have not changed (if anything the over-supply is growing) is still some accomplishment.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

Follow Jameel on Twitter @Jameel_FXTM

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