Volatility has returned to markets in recent days. The prices of both oil and gold have been thrown around by recent crucial fundamental events and with the volatility still to subside, it seems as though neither instrument is ready to settle down quite yet. The price movement is not confined just to gold and oil, with equity markets being impacted in addition to markets such as silver too.
The big driver has been the OPEC decision not to cut oil production levels which sent the price of oil sharply lower last week. However, the potential for this to have actually been a selling climax is fairly high and on Monday we saw oil bounce of around 8% from its nadir of $63.72. However the volatility has continued today and the price is lower once again by 1.5%. The interesting aspect is that the FTSE 100 which has a heavy weighting (over 10%) in energy stocks, has rallied sharply today by 1.0%. The move has just begun to settle slightly as the oil price has started to fall back, but this move on the Footsie follows the 1.0% fall yesterday.
I think that for now, whilst the market remains volatile, forecasting where oil will go from a day-to-day basis will be incredibly hard. Yesterday morning analysts were queuing up to put huge bearish targets on oil, but during extreme markets the potential for snap retracements can be very dangerous. Technical analysts will watch volume levels during these times and volume has been extreme in the past couple of sessions. Extreme volume will often coincide with key market lows (depicting a culmination of selling pressure). This may well have been seen, but the near term market reaction appears to be extremely uncertain still.
The other incredible reaction of note yesterday was on gold with a $79 intraday rally. However once more, it seems as though the price is yet to settle as having peaked at $1221 in the afternoon, the retracement has begun and it is back below the psychological level of $1200. The key price to watch once more on gold becomes $1180.70 which has been a key pivot level in recent months. Losing this support would see the pressure heap back once more on gold. I remain a bear of gold for this medium term period (playing the strong dollar trade) and if I were a bull I would start to get concerned if the gold price did not take out yesterday’s high at $1221 again soon. The silver price rallied an incredible $2 from its low at $14.42 (a move of almost 14%) and as with gold, the move is being retraced.
Ultimately, though the moves yesterday were driven by a reaction to a correction on the US dollar, albeit with sharp volatility. Additionally, today’s retracements have also been exacerbated by renewed dollar strength. I said in my Morning Report videos that the US Dollar Index (.DXY) may be choppy near term but there is still a gradual upside drift over the past month.
This may have made recent trading in EUR/USD, GBP/USD and to a certain extent USD/JPY a little bit messy (all are still in their ranges), but I am still confident that there will be an upside breakout on the dollar which will mean the euro hitting $1.2357, Cable below $1.5585 and Dollar/Yen above 119.13 (which is currently close to doing so already).
From Wednesday onwards, the focus turns very much towards the state of the US labor market, with the ADP employment report, Weekly Jobless Claims and culminating in Non-farm Payrolls on Friday (clearly the ECB monetary policy will be a key interlude on Thursday). However if these numbers start to come through strongly then we could be seeing the dollar strength driving forward once more. This should drive continued weakness in the forex majors and precious metals.