The dollar is losing ground, fuelling the oil and gold rally

Since the start of the month, the US dollar has been losing ground, testing the 92 level for the DXY. The publication of strong NFP data may well have triggered continued pressure on the dollar. Reflation trade went back to the markets: betting on assets that benefit from economic growth. Fears that the Fed might tighten monetary policy in a way that would cause a significant setback in the recovery have receded somewhat.

On the other hand, one must realise that the dollar has accumulated substantial rebound potential from the previous months of decline. Although the Fed promises that it has learned from past mistakes and can avoid turbulence in the markets, it is still worth keeping this development on the periphery. The dollar has room to grow. Its recent strengthening has been quite telling, accelerating after the DXY rose above the 50 and 200-day moving averages. This dynamic is a sure sign of confidence on the part of Dollar buyers.

A bullish scenario remains in effect if the DXY trades above the 200 SMA, which is at 91.40 versus 92.00 now.

Crude Oil

Oil is developing its ascent, passing the $77 per barrel Brent mark and $76 for WTI, highs since autumn 2018. Countries in OPEC+ disagreed with a position on the UAE’s production baseline last week. They cancelled talks on Monday without setting a new date. Without new agreements, the previous quotas, which are clearly below market needs, will remain.

This leads to an influx of speculators in oil. It is also noteworthy that WTI crude is narrowing the price difference to Brent. This is evidence that demand for black gold in the USA is rising ahead of schedule. At the same time, production has stagnated near the 11m BPD mark for almost a year.

Oil is getting speculatively hot and can even go as high as $80. However, such prices remain hardly sustainable, as some of the supply is artificially restrained.

Gold

Gold crossed above $1800 on Tuesday morning for the first time in two and a half weeks. Buying interest picked up after a dip late last month into the 1750 area to support the long-term uptrend. Late last week and early this week, gold has also seen an increase in demand for risk assets and a weakening of the dollar.

An important test for the gold bulls promises to be the area of $1830-1835, where the 50- and 200-day simple moving averages are passing. A solid jump in the price above these levels would significantly build on the bullish momentum after the failure in June. A new wave of retreat of the US currency, if it proves sustainable, could be accompanied by a recovery of traction in the metals and has the potential to send the price towards $1900/oz as early as this month and open the way to the area of historic highs above $2075.

The FxPro Analyst Team