By Barani Krishnan

Investing.com – The dollar fell last week, giving commodity bulls a much-needed relief from the dollar’s very strong weight in five of the previous six weeks. It was the Bank of England’s counter-move against the Truss administration’s frenzy of cutting taxes and increasing spending at the same time that sent the pound – and most other currencies – higher against the dollar.

But will the US dollar return to its highest level in 20 years next week?

Just maybe. A slew of Fed speakers did everything they could last week to talk about the Fed’s mission to use large rate increases to curb inflation – and in the process sent them to a new peak in 2022 at 114.75 on Wednesday before the Bank of England stepped in to back it up. . Pound hits.

“A recession won’t stop the Fed from raising interest rates,” said Loretta Meester, president of the Federal Reserve Bank of Cleveland. “The Fed got it wrong on the continuation and scale of inflation. Given the continuation of inflation, it is still important to make sure the Fed is doing enough.”

Vice President Lyle Brainard announced Friday that the United States remains “too high” and could continue to shock as the Federal Reserve works to subdue the worst price pressures for Americans in four decades. “Monetary policy should be constrained for some time to have confidence that inflation is returning to target,” Brainard added.

If there’s one thing the Federal Reserve staff has done well in the past year, it’s talking about the US economy into a recession. The only reason we don’t get into one is the job market that refuses to give up.

But put pressure on what the Fed does – and many say the central bank has no choice but to wreck the economy now if it wants to rescue it from inflation that could be worse later – then the Fed may take its course.

Central to the Fed’s mission – perhaps not on purpose – is the massive rally in the US dollar this year with the dollar index standing nearly 20% higher against the euro, yen, British pound, Canadian dollar, Swedish krona and Swiss franc.

The dollar’s rise has put other countries trying to boost their economies in a difficult situation: raising interest rates would boost their currency but also halt the economic recovery. China, which cut interest rates to tackle a slowing economy and stem a housing slump, has seen the yuan fall to its weakest level in more than 14 years. Sources told Reuters that the People’s Bank of China has asked major state-run banks to prepare to give up their dollar holdings while snapping up, which has continued to decline despite previous interventions. The scale of these latest efforts to support the yuan will be significant and could provide a floor for the Chinese currency, according to the report.

The dollar’s impact on just about every commodity this year is evident, especially oil, with US crude oil at just under $80 a barrel with annual gains of just 6% now versus about 50% in March when it was around $130.

On Friday, oil bulls once again struggled to break out of negative territory after another sudden rise in US inflation for the month of August, boosting expectations of a big Fed rate hike.

This was despite higher oil prices ahead of next week’s meeting of the OPEC+ alliance of 23 oil producers and exporters. The 13-member Organization of the Petroleum Exporting Countries, led by Saudi Arabia, and its 10 allies, led by Russia, are due to meet on Wednesday to finalize production quotas in November.

Friday’s pressure on oil and other risky assets came after data showed that the Fed’s preferred inflation indicator, grew 6.2% in the year to August, versus 6.4% in the 12 months to July.

Economists polled by the US media expected the so-called PCE index to expand just 6% in the year to August.

On a monthly basis, it actually grew more in August than in July, rising 0.3% from 0.1% previously. Economists had forecast monthly growth of just 0.2% in August.

The readings showed that the Fed’s fight against inflation had narrowed down despite the sharp declines in gasoline prices over the past three months.

By contrast, gold posted modest weekly gains as seemingly safe haven ideas crept into trade on the back of renewed recession fears – helping bullion trades off a surging dollar after a largely miserable September.

Over the month, bullion is down 3%, while during the quarter it is down 7.5% in its worst quarter since March 2021.

Oil: Market Settlements and Activity

New York was trading for November delivery at $79.74, after Friday’s session officially settled at $79.49 a barrel, down $1.74, or 2.1%, on the day.

However, the strong rally in US crude between Tuesday and Wednesday kept the market well positioned for small weekly gains in five, despite the big losses for September and the third quarter – the first quarterly loss for oil in two years.

During the week, West Texas Intermediate crude is up about 1%. With that said, the price of US crude fell 12.5% ​​during the month. In the third quarter, it was down 24%.

The global benchmark for oil traded in London last traded at $85.56 in the December contract, after officially settling Friday’s session at $85.14, down $2.04, or 2.3%.

“The demand outlook for crude oil is taking no favors from economic data or company reports,” said Ed Moya, an analyst at online trading platform OANDA. OPEC+ will have an easy job next week, but oil prices won’t receive a bid until energy traders are confident that a sharp production cut at around 1 million barrels per day will be delivered. Brent crude is set to consolidate below the $90 level.

Those familiar with the Kremlin’s thinking said Russia is pushing OPEC+ to cut production by as much as a million barrels per day or so. But Moscow is unlikely to contribute much to any production cut by the alliance due to the continuing impact on its energy exports from Western sanctions imposed over its invasion of Ukraine.

The Russians have also undermined others in OPEC+ by selling their crude at deeply discounted prices to buyers such as China and India. An OPEC+ production cut, in which Moscow is not fully involved, will benefit Russia more than the rest of the alliance because it may continue to steal customers from others.

Also, OPEC+ has not met its monthly production targets for several months, so any quotas announced by the group may be almost meaningless. Case in point: A Reuters survey published on Friday found that OPEC+ raised its September crude oil production to the highest level since 2020 – but failed to meet its quota in September. Thus, on the way down as well, the alliance may fail to achieve its goal.

Oil: Price Predictions

Oil appears to be stuck between a rock and a hard place, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com, as it is likely to pull indirect support from the Federal Reserve to the dollar, and OPEC data is likely to pull crude oil in both directions.

“Amid prolonged volatility, WTI continues with four-month bearish rounds,” Dixit said.

Note that with WTI below the monthly Bollinger Bands average at $82.20 after testing it at $76.28, the Moving Average Convergence Divergence has started to print a negative histogram while the monthly stochastic reading 26/40 shows enough room for further decline.

“The next drop brings the 200-month simple moving average of $72.35 onto the radar,” Dixit said. “A break of $72.35 will extend the correction to the 50-month exponential moving average of $70.”

He said the positive grind on the weekly 9/6 stochastic could give the WTI bulls “some breathing space” if prices show a recovery after the Bollinger Bands range of the daily average at $83.75, which is above the 50-day moving average at $83.75. $88.85.

“Overall, the broader formation is quite bearish as confirmed by four consecutive months of negativity. At the moment, $72-$70 is still the closest target to the downside, while the 200-week SMA at $63.35 is support Long-term trend reversal.

Gold: Market Adjustments and Activity

The benchmark gold futures contract in Comex, New York, made a final trade of $1,668.30, after the Friday session officially closed up $3.40, or 0.2%, at $1,672 an ounce.

The fiat currency, which some traders follow more closely than futures, officially settled last week at $1,660.98, up 37 cents, or 0.02%.

Gold’s four-day rebound reached its climax on Friday when spot price reached a one-week high of $1,675.35 after data showed a surprising rise in US inflation for August boosted expectations of a more large Federal Reserve. Gold is often seen as a store of value and a hedge against inflation and Fed rate increases.

“Inflation expectations are important … and things are starting to look better for gold,” said Ed Moya, an analyst at online trading platform OANDA.

Despite Moya’s positive opinions, some analysts were less than impressed with the bullion outlook.

“Although the price recently reached a two-year high, it was a lower hedge, and the opportunity costs were high,” said Robert Ceran, commenting on gold on Friday. “The investment 10 years ago in Egypt had tripled.”

Six consecutive months of negative closes have brought the spot gold price down $460 from a record high of $2,073. US inflation is at four-decade highs and the protracted Russia-Ukraine war has been unable to spark gold’s safe-haven status as investors have instead taken their cues from the Fed’s super-sized rate hike and runaway dollar.

Gold: Price Predictions

“Oversold conditions make a case for a short-term bounce back towards the broken support-turned-resistance area at $1,680-1,700,” SKCharting’s Dixit said in his spot gold outlook.

Dixit said the bears seem to prefer letting gold rise a bit so they can put their shorts back at those highs, citing a retest of $1,600 and $1,560 which is the 50% Fib of the $1046-2073 level.

Dixit said that the immediate positive overlap of gold in the weekly stochastic reading of 19/10 calls for a short-term recovery towards the 200-week SMA at $1,680, followed by horizontal resistance at $1,710.

He said, “If gold finds acceptance above $1,710, the bounce could extend well into the next resistance area of ​​the $1,765 weekly Bollinger Band average and the 50-week moving average at $1,795, followed by the 100-week simple moving average at 1,814. dollars”.

Dixit said that the short-term horizon has only a potential for a short-term recovery with the possibility of a dip towards $1,640 and $1,620.

“If the $1,640 and $1,620 areas are breached, gold could drop to $1,600 and $1,560 over the next few weeks,” he said. “On a spot basis, $1645-$1638 will attract buyers with a view to retesting $1681 and $1697-$1710.”

Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.