Commodities Week Ahead: Fed Guessing Game Brings Caution to Oil, Gold Markets

In a perfect world, the U.S. jobs data for March would have told us exactly how the chips would fall with regard to the Federal Reserve’s next move on rates — and how that could help position against gold’s recent highs and oil’s inflection point after the OPEC+ production cuts announced a week back.  

But there isn’t such a perfect world, even with the absence of another nonfarm payrolls report between now and the Fed decision on May 3rd. 

The central bank’s next major employment update is scheduled for May 7th, and reading the tea leaves ahead of that begins with key inflation data due this week, along with the Fed’s minutes of its last rate decision on March 22nd and what light that could possibly shed going forth.

Said Mansoor Mohi-uddin, chief economist at the Bank of Singapore:

“Investors are anticipating last month’s US bank failures will force the Fed to cut rates, but officials warn sticky inflation will make the Fed unlikely to ease policy this year.”

Add to that Friday’s NFP report that showed that nonfarm payrolls increased by 236,000 jobs last month, just shy of the 239,000 called by Wall Street’s forecasters and well above the 200,000 that would have been instrumental in getting the Fed to pause in May. Annual wage gains also slowed but remained too high to be consistent with the central bank’s 2% inflation target.

Inflation expectations from the Consumer Price Price Index, or CPI, reading for March, due Wednesday, are on the higher end, too, though somewhat benign. Economists expect core consumer price inflation, which excludes food and fuel costs, to rise 0.4% on a month-over-month basis, for an annual increase of 5.6%, up from 5.5% in February.

The NFP and forecast CPI, combined, are suggesting at the least that the Fed has another 25 basis point hike coming in May that would effectively raise rates to a peak of 5.25%. So far, Wall Street expectations for a Fed rate cut — not just pause — by year-end appears to have little currency.

Citigroup strategists said in comments carried by Reuters:

“Not only should high inflation and a still-strong labor market keep cuts unlikely. But we see persistently too-strong inflation as leading to further hikes.” 

That leaves the question of where gold and oil could be headed in the near-term.

The relatively stronger-than-expected NFP did not help gold bulls for sure, but those expecting an immediate crash at the New York pre-open didn’t get that either in Monday’s Asian trading. 

U.S. gold futures for June delivery got to a session low of 2,004.25 versus Thursday’s settlement of $2026.40. 

While gold is unlikely to get to a new record high given the somewhat upbeat NFP report, it did not see a gap down open either on Monday, suggesting that support is forming at the higher $1,900 levels, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

“Failing to make a sustainable break above the resistance zone can push prices below $1,990 towards $1,975 as initial support followed by $1,970,” Dixit said, referring to the spot price of gold.

"But on a 4-Hour time frame, gold maintains above the 50-Exponential Moving Average of $1,990, and the next upside challenge is seen at the 5-Exponential Moving Average of $2,001, followed by the Middle Bollinger Band of $2,010.”

He added that the potentially bearish “pin bar” formation of April 5th had had its impact of pushing prices down towards the Daily middle Bollinger bands, now dynamically positioned at $1,970 as the metal dips below the 5-Day EMA of $2,000 to keep stability below the zone.

On the oil front, U.S. West Texas Intermediate crude got to as high as $80.70 before retracing all of that and turning negative by 04:00 ET (08:00 GMT).

Despite the runaway gap remaining to be filled in with price correction, WTI continues to trade with positive bias supported by a horizontal support base formed at the dynamically positioned 5-Day EMA of $79.70, said Dixit.

“As long as the mentioned support holds, we see the possibility of a retest of the swing high of $81.80 and bullish momentum targeting further upside toward 50 Week EMA of $82.50, followed by the 200-Day SMA of $83.33 and the 100-Week SMA of $84.80.

On the flip side, a sustained break below 5 Day EMA $79.70 will press for a drop to 5 Week EMA $77.45 before any new signs of a rebound.”

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.