There are some signs in the last 24 to 48 hours that the US dollar (USD) may be starting to find support again. This is beginning to weigh on the prices of commodities. Precious metals and copper seem to be most affected, but the rally in the oil price could also be starting to wane too. We look at the key signals and levels to watch.
- USD has picked up after its corrective period. If this continues, it will be negative for commodities.
- The Gold rally has failed again around resistance, maintaining its neutral and ranging outlook.
- Silver has pulled back to test its recovery uptrend
- Even the rally on oil is beginning to stutter
USD picking up is negative for commodities
When analyzing markets, it is important to look for potential turning points. Points that suggest sentiment is about to change. The recent improvement in the dollar (over the early part of this week) needs to be watched. This USD tick higher could become something more important if it continues. It could have significant implications across asset classes, not least of all in commodities.
USD will tend to strengthen when risk appetite starts to tail off. In the last few sessions, we have started to see the Dollar Index ticking higher.
On Dollar Index, there is key support around 93.20/93.70 (the old resistance from March, July, and August highs is now a basis of support). The support of the five-month uptrend is also not far away either. A near-term corrective trend has also been broken.
The USD has been corrective for much of October, but now this correction looks to be settling down again. A weaker USD is positive for commodities, but also with USD starting to pick up, this is weighing on commodities. We can see this in the relative performance of commodities throughout October. The recovery trends on commodities may now come under threat.
Gold attempted rally is faltering
Gold still has a strong negative correlation with the performance of the USD. As the dollar picks up, this is negative for gold.
If the USD has begun to find support, then it will be hard for gold to sustain a recovery trend that has been forming over recent weeks. The technicals on Gold (MT5 code: XAUUSD) shows that resistance at $1810 has held firm this week and the market has retreated to test the uptrend.
A move back under $1780 (which acted as a pivot line throughout August and September) would also now break the recovery uptrend. Already the signs are that gold is simply reaffirming the neutral positioning that has formed between $1750/$1810.
Silver also retreating to a key test of support
A one-month recovery is also present on Silver (MT5 code: XAGUSD) too. As with gold, we have seen a retreat back towards the recovery uptrend (which comes in today around $23.65). On silver, there is also a test of old pivot support around $23.75/$24.00. For now, this is still a recovery phase, but this outlook is being questioned.
The positive momentum has slipped back in recent sessions, but the RSI is still above 50. However a close below $23.65 would break the pivot support and the one-month uptrend, but if this also came with the RSI back under 50, it would confirm the recovery was over. The threat would then be a renewed corrective outlook forming and to open for a slide back towards $22.75/$23.18 once more.
Oil rally remains on track, for now
The key question is whether this USD rebound can derail the oil price rally. For now, the rally is intact, however, there are a few signs of potential waning momentum starting to show.
On Brent Crude oil (MT5 code: UKOUSD) we see the drift higher over the past week has been edging towards the 2018 high of $86.95. The 10-week uptrend is intact, and even though the market is slightly lower today, there is still a positive outlook.
However, the slow drift of the move in the past week or so has begun to show in waning upside momentum. There is a mild negative divergence where the RSI is slipping away having been above 70. This is a warning signal. With the market also failing (so far) to breach the key resistance at $86.95, this suggests a degree of caution in the rally.
There is a key band of near-term support $82.80/$84.10 that needs to hold to prevent a corrective move from developing.
For now, the USD outlook is still uncertain, but the pick-up in the past couple of days has undoubtedly impacted commodity prices. If this USD rebound continues, then the October rallies on Gold and Silver will certainly come under pressure.