Market Outlook EURUSD, Gold, and Oil Are Poised For Big Moves

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Dow Charges to Record While Dollar, Gold, Oil, FX Majors Embrace Ranges

We are heading into a new trading week with some extreme divergence in benchmark assets. On the one hand, we have the Dow leading US indices to record highs as the VIX remains crushed to extreme lows. Yet, the speculative single-mindedness this commitment may suggest doesn’t seem to be well reflected in other risk assets, major FX pairs, crude oil or gold. Why?

Gold prices may be given a tailwind from the FOMC minutes and escalating trade war risks if they fuel demand for anti-fiat assets amid expectations of additional Fed easing.

The Australian Dollar has been hit in recent days by a slew of bearish news from both home and abroad. There may be less of this to come in the week ahead, but it’s still hard to see the currency rising.

The Euro’s struggle to move higher against a range of currencies continues and without further support this is likely to continue into the year-end.

Dow Jones hits record high, however, central bank liquidity prompts volatility implosion. FTSE 100 among underperformers with focus remaining on politics.

The Euro made cautious upside gains, with EUR/USD showing most potential for upside follow-through. EUR/JPY and EUR/AUD may stall at key falling channels as EUR/GBP eyes 2020 lows.

The Aussie sell-off halted at key lateral support this week and puts the focus on a break of this key range. Here are the levels that matter on the AUD/USD weekly chart.

The Dow Jones moved confidently higher last week as it added onto recent gains. Now, stocks will aim to continue their rally while enjoying support from prior all-time highs.

Gold eased down to a three-month low this past week, but the move hardly counted as a ‘break’ and was even lighter when it came to follow through. Where and when will the next trend form?

The outlook for the British Pound continues to hinge on the outcome of December’s UK election and its implications for Brexit. The contest’s first debate looms ahead.

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The US Dollar fell, looking to FOMC and ECB minutes for Euro price action. It may rise against the Canadian Dollar on CPI data and if US-China trade deal bets suddenly decline.

As we head into next week, Cable is continuing to digest the massive leg higher last month, which at some point soon could mean another surge.

Gold (XAUUSD) = Yellow

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

Technical Trade Levels: US Dollar, EUR/USD, USD/CAD, Gold and Oil

Weekly Technical Trade Levels on USD Majors / Commodities

  • Technical trade setups we’re tracking across the USD Majors / Commodities this week
  • Updated trade levels on DXY, EUR/USD, USD/CAD, Gold, Crude Oil and more
  • New to Gold Trading? Get started with this Free How to Trade Gold -Beginners Guide

US Dollar Breakout Targeting Initial Resistance – Gold Price Recovery Tests Downtrend Resistance

A breakout in the US Dollar has taken the index to fresh four-month highs with DXY now approaching the 2020 high-week close just higher. While the near-term focus remains constructive, we’re looking for a reaction in price on a stretch higher into technical resistance. Gold opens the week just below near-term downtrend resistance – are of interest for possible topside exhaustion near-term. In this webinar, we review the updated technical trade setups on DXY , EUR / USD , GBP/USD , USD / CAD , Gold (XAU/USD) , S&P 500 (SPX500), USDJPY, AUD/USD , Crude Oil .

Key Trade Levels in Focus

US Dollar – The US Dollar breakout is approaching topside resistance objectives at the High-week close at 98.84 and 98.96/98 – both regions of interest for possible topside exhaustion IF reached. Initial support 98 .40 with near-term bullish invalidation at 98.32 . Review my latest US Dollar Price Outlook for a closer look at the longer-term weekly DXY technical trade levels.

EUR/USD – Euro is testing a near-term support zone at the 88..6% retracement of the September advance / 2020 low-day close at 1.0920/32 – looking for a reaction there IF reached. Resistance at 1.0976/81 backed by bearish invalidation at 1.1016 . A break lower from here exposes subsequent support at 1.0882 . Review my latest Euro Price Outlook for a closer look at then near-term EUR/USD technical trade levels.

USD/CAD – The Canadian Dollar has been on the defensive for the past five-weeks with USD/CAD approaching an area of confluence resistance at 1.3330/36- a region defined by the September high-day close and the 61.8% retracement of the May-decline. Looking for a reaction there for guidance IF reached. Initial support 1.3270 with near-term bullish invalidation at 1.3231 . A topside breach from here would expose 1.3382 . Review my latest Canadian Dollar Price Outlook for a closer look at then longer-term USD /CAD technical trade levels.

Gold – Gold prices mounted a rally of more than 1.7% off the monthly lows with XAU/USD now testing near-term confluence resistance at 1575 – the immediate advance may be vulnerable while below this threshold. Near-term support 1560 and 1552 . Review my latest Gold Price Outlook for a closer look at the near-term XAU/USD technical trade levels.

Understanding the Correlation of Oil and Currency

There is a hidden string that ties currencies to crude oil. With the price actions in one venue, it forces a sympathetic or opposing reaction in the other. This correlation persists for many reasons, including resource distribution, the balance of trade (BOT), and market psychology. Also, there is crude oil’s significant contribution to inflationary and deflationary pressures that intensifies these interrelationships during strongly trending periods—both to the upside and to the downside.

Oil and the U.S. Dollar

Crude oil is quoted in U.S. dollars (USD). So, each uptick and downtick in the dollar or in the price of the commodity generates an immediate realignment between the greenback and numerous forex crosses. These movements are less correlated in nations without significant crude oil reserves, like Japan, and more correlated in nations that have significant reserves like Canada, Russia, and Brazil. 

Key Takeaways

  • Oil and currencies are inherently related wherein price actions in one force a positive or negative reaction in the other in countries with significant reserves.
  • The USD has benefited from crude oil’s precipitous decline since the energy sector is a significant contributor to U.S. GDP.
  • Countries that depend heavily on crude exports experience more economic damage than those with more diverse resources.
  • Countries that buy crude oil and those that produce it exchange USD in a system called the petrodollar system.

Development of Oil Correlations

Many nations leveraged their crude oil reserves during the energy market’s historic rise between the mid-1990s and mid-2000s, borrowing heavily to build infrastructure, expand military operations, and initiate social programs. Those bills came due after the 2008 economic collapse, where some countries deleveraged while others doubled down, borrowing more heavily against reserves to restore trust and trajectory to their wounded economies.

These heavier debt loads helped keep growth rates high until global crude oil prices collapsed in 2020, dumping commodity-sensitive nations into recessionary environments.   Canada, Russia, Brazil, and other energy-rich countries struggled for a few years, adjusting to plummeting values in Canadian dollars (CAD), Russian rubles (RUB), and Brazilian reals (BRL), but showed signs of rebounding in 2020 and 2020. 

Selling pressure has spread into other commodity groups, raising significant fears of worldwide deflation. This has tightened the correlation between affected commodities, including crude oil and economic centers without significant commodity reserves like the Eurozone. Currencies in nations with significant mining reserves but sparse energy reserves, like the Australian dollar (AUD), have plummeted along with the currencies of oil-rich nations.

Trouble in the Eurozone

Plummeting crude oil prices set off a deflationary scare in the Eurozone after local consumer price indices turned negative at the end of 2020. Pressure built on the European Central Bank (ECB) in early 2020 to introduce a large-scale monetary stimulus program to stop the deflationary spiral and add inflation into the system. The first round of bond-buying in this European version of quantitative easing (QE) began the first week of March 2020. QE by the ECB continued until mid-2020. 

EUR/USD vs. Crude Oil

Many forex participants focus their full attention on the EUR/USD cross, the most popular and liquid currency market in the world. The currency pair topped out in March 2020, just three months before crude oil entered a mild decline that accelerated to the downside in the fourth quarter—at the same time crude broke down from the upper 80s to low 50s.     Euro selling pressure continued into March 2020, ending at the same time that the ECB initiated its monetary stimulus program.

Venezuela has the largest number of crude oil reserves, according to OPEC.

U.S. Dollar (USD) Impact

While the United States has moved up the ranks in worldwide petroleum production, the U.S. dollar has benefited from crude oil’s precipitous decline for several reasons. First, U.S. economic growth since the bear market has been unusually strong compared to its trading partners, keeping balance sheets intact. Second, while the energy sector significantly contributes to U.S. GDP, America’s great economic diversity reduces its reliance on that single industry.

USD vs. Crude Oil

Invesco DB U.S. Dollar Index Bullish Fund (UUP), a popular USD trading proxy, hit a multi-decade low at the height of the last bull market cycle in 2007 and turned sharply higher, hitting a three-year high when the bear market ended in 2009. Then, higher lows in 2020 and 2020 set the stage for a powerful 2020 uptrend that began just one month after crude oil peaked and entered its historic downtrend. 

Inverse lockstep behavior continued between instruments into 2020, when the USD continued its pullback. The top was simultaneous with the start of the ECB’s QE program, illustrating how monetary policy can overcome crude oil correlation, at least for significant time periods. The run-up into an anticipated FOMC rate hike cycle has contributed to this holding pattern as well.

Results of Over-Dependence

It makes sense that nations that are more dependent on crude oil exports have incurred greater economic damage than those with more diverse resources. Russia offers a perfect example, with energy representing over 65% of its total 2020 exports. 

The country fell into a steep recession in 2020, with GDP declining 4.6% year-over-year in the second quarter of 2020, intensified by Western sanctions tied to its Ukraine incursion. GDP for Q3 2020 fell 2.6% year-over-year, and then 2.7% for Q4 2020. Then, with the turnaround in crude oil prices, Russian GDP saw a marked turnaround. GPD growth turned positive in Q4 2020 and has remained so ever since.

Gazprom is Russia’s largest oil producing company.

Here are the countries with the highest crude oil exports based on barrels per day, according to the CIA’s World Factbook with data from 2020:

  • Saudi Arabia with 7.3 million
  • Russia with 5.1 million
  • Iraq with 3.3 million
  • The United Arab Emirates with 2.7 million
  • Canada with 2.7 million 

Economic diversity shows a greater impact on underlying currencies than absolute export numbers. Colombia ranks 19th, but crude oil represents 25% of total exports, pointing to high dependence illustrated in the collapse of the Colombia peso (COP) since the middle of 2020.   Meanwhile, that country’s economy has cooled off considerably after a torrid growth spurt.

The Ruble’s Collapse

Many Western forex platforms halted ruble trading in early 2020 due to liquidity issues and capital controls, encouraging traders to use the Norwegian krone (NOK) as a proxy market. USD/NOK shows a broad basing pattern between 2020 and 2020 at the same time that crude oil was bouncing between $75 and $115.     Crude oil’s downturn in the second quarter of 2020 matches a powerful uptrend that accelerated in the fourth quarter.

That rally continued into second-half 2020, with the currency pair hitting a new decade high. This points to continued stress on the Russian economy, even though crude oil has come off its deep lows. Still, the pair has soared along with crude oil. High volatility makes this a difficult market for long-term forex positions, but short-term traders can book excellent profits in this strongly-trending market.

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