Brenda Kelly: How dollar strength will affect gold and oil

Alexander Bueso Sharecast | 21 Aug, 2014 20:50 | | |

The dollar basket is now at its highest level since 2013. The market is currently altering positioning in anticipation of an end to quantitative easing (QE) and the potential for rate hikes to come to pass.

The dollar basket is now at its highest level since 2013. The market is currently altering positioning in anticipation of an end to quantitative easing (QE) and the potential for rate hikes to come to pass.

The strength of the dollar is not without some casualties.

The commodities suite remains under pressure as a result of the hawkish sentiment surrounding the greenback while a lack global growth coupled with the weak Chinese and Eurozone PMI today is capping any real upside in oil prices.

Gold's allure seems to be taking a back seat for now. The lack of yield juxtaposed with the bounce-back in equity markets and the S&P 500 making yet another intraday all-time high along with the distinct lack of near-term inflationary pressures, which altogether signals that that investor appetite will remain underwhelming.

Gold

Minutes from the most recent Federal Reserve Open Market Committee meeting indicated that a rate hike was debated, in light of an improving jobs market and rising yet subdued inflation.

Even investor nervousness around the conflicts in the Middle East and Ukraine has failed to put a fire under the price of the metal.

Now that we are watching the price retreat below the 200-day moving average, there is a greater bias for additional downside.

The crux support lies at $270 and the rising trend line from the lows last seen in December 2013.

Only a break above the $1,340/oz mark would reverse the current reverie in the yellow metal.

Brent

Strong US demand may now start to be a factor in oil prices. The Philly Fed Business index beat expectations, existing home sales have also jumped higher in July and manufacturing output is at a four-year high.

Much of the disappointment over the Q1 GDP figure also seems to have been put to bed.

It seems weather was a factor for the decline in growth in the first part of the year after all.

Unable to move higher than $102.35 yesterday, the downtrend still remains. We may be seeing signs of a bottom at the $101.12/bbl mark. A break back through $102.63 targets $103.18.

All eyes are on Jackson Hole tomorrow, the Wyoming mountain resort where Fed chair Janet Yellen will take centre stage and will likely in her rhetoric either allow the dollar to continue its bullish trend or add some dovishness into the mix for good measure.

Brenda Kelly - Chief Market Strategist at IG

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