By Lukman Otunuga, Research Analyst, FXTM
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Oil prices for the benchmark WTI plummeted below $40 at the end of the week following OPEC’s decision to keep production levels unchanged during their latest meeting in Vienna. Any optimism over a possible production cut diminished rapidly when the group failed to agree on a production ceiling, leaving current production at 31.5 mln barrels per day.
With concerns elevated around the aggressive oversupply in the markets, investor sentiment will remain haunted towards WTI oil in the short-term and selling in the commodity will resume. This will consequently add pressures to those currencies that belong to economies which rely on oil exports.
WTI remains fundamentally bearish and the ongoing indications that OPEC is willing to leave production levels unchanged despite a continuous oversupply in the hope of regaining market share will leave prices vulnerable to further losses. WTI oil suffers from a dangerous combination of an excessive oversupply and sluggish global demand in the markets which has consistently weighed heavily on investor sentiment.
From a technical standpoint, WTI is heavily bearish as there have been consistent lower lows and lower highs on the charts. Prices have managed to breach the psychological $40 support and this may encourage sellers to send prices towards the next relevant support at $39. Lagging indicators such as the daily 20 SMA and MACD, which also point downwards, compliment this bearish view.
Optimism around the prospects of a December US interest rate hike was reinforced on Friday after November’s NFP report exceeded expectations at 211,000. US economic data are looking strong and November showed positive results – as a result, the markets are heavily weighing in favour of a rate rise this month. Sentiment towards the USD is bullish and with the Fed futures illustrating a near 80% possibility that the Federal Reserve may raise US rates, Dollar strength should take centre stage in the global currency markets.
EURUSD aggressively bounces
The ECB’s under delivery on the implementation of measures to raise inflation as quickly as possible sparked an aggressive 3.3% bounce in the EURUSD during Thursday’s trading session. Disappointed market participants discarded the news that the ECB would extend QE until March 2017, because they were hoping for far more from the ECB.
The Eurozone’s 2% inflation target continues to face headwinds from factors like the fall in commodity prices, but this did not offer a compelling argument for the ECB to unleash a higher quantity of QE quite yet. Although the ECB is still saying further QE is possible, market participants are very disappointed with the central bank and anything that is said by Mario Draghi and other policy members could be taken with a pinch of salt until at least the turn of the year.
Traders will continue to look at the existing divergence in both economic sentiment and monetary policy between the United States and Europe, which should encourage sellers to attack the EURUSD once they get over the disappointment from the ECB decision. Even though Friday’s positive NFP release only caused a minor decline in the EURUSD, as long as the Fed raises interest rates in December, this should in theory encourage sellers to send the EURUSD back towards its lows around 1.050.
GBPUSD: Despite the hefty appreciation which the GBPUSD experienced on Thursday, this pair remains bearish as long as prices can keep below the 1.515 resistance. The candlesticks still reside below the daily 20 SMA and the MACD trades to the downside. A breakdown below 1.506 may encourage sellers to send prices back towards 1.500.
AUDUSD: The AUDUSD is technically bullish as there have been consistent higher highs and lows since the breach above 0.7200. A breakout above 0.7380 should encourage buyers to attack the pair towards 0.7450.
USDJPY: The USDJPY is in a phase of consolidation on the daily timeframe. A breakout above the 123.50 resistance may open a path towards 125.00.
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