Commodities Week Ahead: Oil, Gold Likely Whipsawed By Volatility In Fed Week 

Volatility could be the game for both oil and gold this week as the Federal Reserve prepares to hit markets with this year’s fourth US rate hike, while Chairman Jerome Powell lends guidance on the economy that will be closely read for any signs of recession.

Crude prices opened the week lower, as did gold, ahead of Wednesday’s rate decision by the central bank’s Federal Open Market Committee. 

Forecasters’ overwhelming consensus—almost 80%—is that there’ll be another 75 basis point hike for July, just like in June. If so, that will bring rates to a range of 2.25-2.50% by the end of this month, from the 0-0.25% they stood at in February before the increases.

With three more rate decisions left for this year, Fed officials are indicating a high-end of 3.5% or even 4% for rates by the year-end. 

But money market traders are also pricing in rate cuts by 2023 if economic fallout from the Fed hikes turns out to be too great. This comes after bets rose to as high as 70% last week for a record 100-basis point hike in July.

The fact that the market is even contemplating rate cuts by next year tells economists that the risk of a Fed-induced recession between now and then is reasonably high. 

The US economy has already contracted 1.6% in the first quarter and a second quarter in the red is all that’s needed to technically call a recession. The first reading for Q2 GDP data will be on Thursday, a day after the Fed rate decision and Chairman Powell's take on the economy and the potential for recession.

On Friday, a new print for inflation will likely be set by the release of the US Core PCE prices, which are expected to jump to a growth of 0.5% month over month, from 0.3% last month.

Jeffrey Halley, who oversees online research for online broker OANDA, said given “Wall Street’s schizophrenic nature of late,” it is likely that recession fears will persist in oil and other risk assets at least until the first reading for the Q2 GDP is known. Adding:

“Oil futures' biggest problem is that the mind-boggling intra-day volatility seen of late is likely to reduce risk positioning, and thus, trading liquidity. A negative feedback loop (is) likely to exacerbate price moves.”

In Monday’s Asian trading, New York-traded West Texas Intermediate (WTI) crude for delivery in September was down $1.14, or 1.2%, to $93.56 a barrel by 2:50 PM in Singapore (2:50 AM EST). 

The US crude benchmark fell almost 3% last week, extending to nearly 13% its loss over the past three weeks. WTI also hit a near five-month low of $90.58 on July 14.

Commodities chartist Sunil Kumar Dixit of skcharting.com said a sustained break below the 50-Week Exponential Moving Average of $92.88 could prompt WTI to retest the near five-month low of $90.58 hit on July 14. Adding:

“This will be an acceleration point towards the next leg down of $88 and the horizontal support areas of $85 and $83. If selling momentum gains strength, WTI can drop to the monthly middle Bollinger Band $78.50.”

London-traded Brent crude for delivery in October was down $1.13, or 1.2%, to $97.25 a barrel. The global crude benchmark finished up 2.2% last week, but not before a drop to a near five-month low of $95.42 and a five-week losing streak that left it poorer by 17%.

Amidst a summer of hot demand and hot prices, central banks and investors in the US, Europe, and globally will be watching to see whether economies can tackle the challenges of inflation without overly crimping the economy, a tricky balance to manage.

Russia’s war with Ukraine continues despite the green shoot of an agreement last week to allow Ukraine to ship grain out of its Odesa port in what promises to be a huge relief to global food shortages.

The impact on global commodity markets, be they grain or oil, is a big focus for investors vis-à-vis Ukraine and Russia. But there were also hopes that the Turkish-negotiated deal over grain shipments might be a first step toward broader agreements. Implementation of this deal, as well as further developments in the war this week as it enters its seventh month, will help answer whether skepticism should continue to reign.

In gold, benchmark futures for August delivery on New York’s COMEX was down 0.1% or $2.40 to $1,725 an ounce. August gold plumbed a near 16-month low of $1,680.96 on Thursday.

For the week, August gold rose 1.4%, after a previous five-week tumble that cost bulls a total of $172 or 9%.

Gold dipped as the Dollar Index, which pits the greenback against six major currencies, rose for the first time in three days after slumping to a more than two-week low of 105.98 on Friday. The dollar, a contrarian trade to gold, hit two-decade highs earlier this month, rising to 109.14 on July 14.

Gold is supposed to be a hedge against inflation but it has not been able to hold up to that billing for most of the past two years since hitting record highs above $2,100 in August 2020. One reason for that has been the rallying dollar, which is up 11% this year after a 6% gain in 2021.

With an ounce remaining in the low $1,700 range, gold could be vulnerable to another dip into $1,600 territory next week.

But if Thursday-Friday trends are any indication, bullion could also bounce forcefully from any descent into the sub-$1,700 zone that could catapult it towards $1,800.

According to Halley:

“Two positive sessions do not mean gold is out of the woods, but the technical picture does suggest it is trying to form a base, having bounced off long-term support near $1680.00 an ounce last week.” 

“It faces a myriad of data and event risk this week, but the chart does suggest buying the dips toward $1700 with a tight stop wouldn’t be the dumbest call of your career.”

Dixit of skcharting.com concurs with that view, adding: 

“If further strong buying and short covering from retail traders cause robust momentum, gold can extend recovery to $1,770-$1,780-$1,800-$1,815.” 

But a rejection from the $1,750-$1,760 areas will result in resumption of correction toward a retest of the $1,700-$1,680 levels, he cautioned, pointing out that the next low could be $1,655.

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Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.