Weak US dollar sends oil and gold higher

Brent crude closes in on USD 60.00 a barrel

On Friday, a weaker US dollar prompted more oil buying on Wall Street with Brent crude rising to within a hairsbreadth of USD60.00 a barrel. With the Biden stimulus controlling the narrative on economic recovery, high OPEC+ compliance, and a weaker US dollar, Brent crude rose 0.95% to USD59.55 a barrel. Treasury Secretary Yellen’s weekend remarks that the stimulus could generate full employment by next year has boosted sentiment in Asia, Brent crude advancing 0.45% to USD59.75 a barrel.

The story was much the same with WTI. It rose 0.90% to USD56.95 a barrel on Friday, advancing another 0.75% to USD57.40 a barrel in Asia today.

Although all seems well and lovely with the global recovery oil narrative, some short-term warning signs are lurking. Notably, the Relative Strength Indices (RSI’s) on both contracts have now moved into severely overbought territory. That sends a very loud signal that oil is vulnerable to a potentially aggressive short-term correction lower, although it will not change the underlying longer-term bullish narrative. Investors should tread carefully, getting long Brent above USD60.00 in the first half of this week.

Brent has resistance nearby at USD60.00 a barrel, with some stop-loss and option-related buying sure to emerge if it breaks. In the medium-term, a rally through USD60.00 a barrel opens up the road to USD66.00 a barrel, although the short-term picture is far murkier. The nearest support for Brent crude is at USD57.50 a barrel, highlighting the risks of being long at these levels at the beginning of the week.

WTI’s initial resistance remains still distance at USD59.65 a barrel, followed by the psychological USD60.00 a barrel mark. WTI has no material support until USD54.00 a barrel, and again highlights the warning signs the very overbought RSI’s are sending to the short-term market.

Gold dodges a bullet once again

On Friday, the fall in the US dollar gave gold a get out of jail card as it rose 1.13% to USD1814.20 an ounce. The price action though, still suggests a stay of execution rather than a structural change in sentiment.

Gold has edged lower to USD1810.50 an ounce in directionless Asian trading with today’s intraday highs at USD1818.50 an ounce forming initial resistance ahead of previous support at USD1830.00 an ounce. Realistically, gold longs can only start breathing easier again if gold recaptures USD1850.00 an ounce.

Risks remain skewed to the downside and a rise in the US 10-year yield and/or US dollar strength signals another bout of gold weakness. Thursday’s lows at USD1785.00 an ounce form initial support, with failure setting markets up for a test of long-term structural support at USD1760.00 an ounce. All bets are off if that level fails.

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