Market Overview

Year-end correction for Crude Oil and Pound blues

The approach of the Christmas weekend and New Year holidays are accompanied by a fall in market liquidity making them more sensitive to any news. It looks like we risk a correction this year after a seven-week rally since early November.

Global markets managed to shake off most of the initial fears and rebounded from much of the initial decline on the day. The S&P500 fell 0.44% over Monday, although intraday futures were down 3.2% at one point. The situation is similar in the FX market, where EURUSD ended the day with a symbolic decline of 0.1%, although intraday losses exceeded 1%.

GBPUSD, the anti-hero of the day, reduced its losses to 0.5% by the end of Monday vs a 2.5% decline in the middle of the day. From a technical analysis perspective, it managed to gain support on the dip to the 50-day moving average, which has acted as support over the past two months and has earned a reputation as a short-term trend signal line.

The persistence above the 50 and 200-day averages clearly shows the superiority of the buyers, but the situation could change rather quickly. A decline in the GBPUSD under 1.3200-1.3250 area would overrule the optimistic scenario.

The pessimistic – correctional – scenario is on the table for this week. On Tuesday morning we see further caution prevail in the markets; key indices are back in the red zone and the dollar is adding, pushing GBPUSD, at one point, below 1.3400.

Traders should have even more caution towards Crude Oil. Brent is now trading at the $50 line, having lost more than 4.5% from Friday’s highs. That said, there are few signs of a reversal in oil on Tuesday.

Buyers’ weakness there is easy to understand as a new strain of the novel coronavirus in the UK and South Africa has led to a sharp tightening of lockdowns around the world, putting fears on the prospects for oil demand recovery. On the daily charts, the RSI climbed into overbought territory late last week, and a sharp reversal to the downside yesterday gave an informal start to a corrective pullback after the euphoric rise from the beginning of November.

For Crude Oil, the nearest target for the correction may lay around $49. A deeper, albeit very likely, target for the pre-New Year correction is the $46.5 area, where prices consolidated in early December and where the 61.8% Fibonacci rally line runs.

The FxPro Analyst Team

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