Commodities Update: Oil, Gold, Silver Rally on Weakening U.S. Dollar

07/17/2023

4 minutes read

2023.07.17 08:48

Market optimism continues to run high. A day after the consumer price index showed the lowest 12-month increase since March 2021, producer prices also proved to be following suit, showing a marginal 0.1% rise in the 12 months to June, the lowest level in almost 3 years, before the economy started its post-pandemic boom.

The battle against inflation seems to be won, and although there is still some room for marginal improvements, the stagflation scenario, which seemed like a real threat just six months ago, seems highly unlikely now. The fact that PPI has dropped below CPI shows that price rises have been flushed out of the production line, and so far, finished goods are unlikely to see continued appreciation in the immediate future.

This has led many to believe that, despite what was so highly feared as we started the year, a recession is becoming less and less likely in 2023. The US economy has shown tremendous resilience and that of course has been helping the stock market push higher. The key now is going to be whether the economy can achieve a soft landing without seeing inflation spike up again, which would be the ideal scenario and would boost market sentiment even further.

Looking at the market-implied rate curve, which interestingly remained unchanged post-CPI data, shows that markets are almost entirely convinced that another 25bps hike is expected in 12 days’ time, with the terminal rate holding above 5% until March next year. Rate cuts have been priced out as the Fed has remained adamantly hawkish, but this may also lead to increase fears that monetary policy will remain restrictive for too long, and thus hinder economic growth, which has led bond yields to pull back slightly.

Regardless, the immediate aftermath of the weaker-than-expected inflation readings has caused the USD to pull back sharply, with the (DXY) breaking below this year’s key support (100.35) and trading at its lowest level since April last year.

US Dollar Index (DXY) daily chart

And commodities have been taking advantage of this rise in optimism and drop in the dollar, especially those denominated in the currency. Oil, for example, is highly sensitive to economic data and market sentiment, and has risen 15% in the past two weeks. West Texas Intermediate (WTI) is trading above $76 per barrel for the first time since late April. The daily chart shows a consistent pattern of higher highs and lows which has been supporting the push higher, but the commodity has now run into the 200-day simple moving average (SMA) at $77.02, which can be seen as a tough area of resistance.

West Texas Intermediate (WTI) daily chart

Looking at the Relative Strength Index (RSI) we can see that it is not common for it to break above the overbought 70 line and usually sees some sort of retracement around current levels before resuming the push higher. Given the resistance at the 200-day SMA has already started to show signs of pausing the move higher in Friday’s trade, we could in fact be in for a small pullback before resuming the move higher as we see some traders taking profits after the recent moves and assessing the likelihood of continuation within the bullish pattern, with the 100-day SMA looking like a good area of support at $73.53.

Despite the chances of a pullback, if sentiment remains high and the US dollar is subdued it’s likely that we see a renewed push higher at which point traders will need to be aware of the resistance range between $80.65 and $82.54 which was acted as a strong barrier in the last quarter of 2022 and beginning of this year.

Elsewhere, Gold (), which is typically thought to be a recession hedge and therefore performs well when concerns surrounding the economy are high, has been struggling to find the momentum to consolidate higher. The weakness in the dollar has helped the commodity rise in value but traders are likely to place their capital elsewhere where they believe they’ll get higher returns given the risk-on sentiment.

That said, the drop in yields will also help propel gold prices higher given its inverse relationship, as it is a non-yielding asset. Traders may also be looking to include gold in their portfolios to diversify their risks if a change in market momentum were to occur.

On the chart, XAU/USD has found some short-term resistance just above the 50-day SMA (1,954) which is making it hard for buyers to advance further. Up ahead, the area between 1,060 and 1,970 has seen a lot of selling pressure in the past few months so it may be another topping point as the commodity advances.

Gold (XAU/USD) daily chart

Meanwhile, Silver () which, aside from having similar safe-haven properties as gold is also used as a base material in some industrial processes, has been making the most of the bullish appetite in markets and has risen 10% in the last week. The momentum has been the strongest on the two days when US CPI and PPI were released, alluding to the precious metal’s sensitivity to improving economic forecasts.

The rally has broken above prior resistance at 24.50 and is looking to break above the $25 mark for the first time since early May. But traders should be aware of the potential for a pullback given the magnitude of the recent moves. Like what happened in March as the banking turmoil was unfolding, Silver’s rapid advance may become unsustainable if there is an absence of retracements along the way, meaning that sooner or later sellers will catch up. It looks like we may be in for some sideways consolidation over the coming days around the 24.85 level before resuming the move higher if risk-on sentiment prevails. A possible catalyst for the continuation of the bullish pattern may be the Federal Reserve’s reaction to the drop in inflation over the coming days, as a more dovish view will ignite risk appetite even further.