Talking Points

  • Commodities Outlook Anchored to Risk Implications of ECB Rate Decision
  • Draghi & Co. Must Deliver Beyond Rate Cut, SMP to Boost Sentiment

All eyes have turned to the European Central Bank monetary policy announcement after the Federal Reserve disappointed on additional stimulus as expected. The pursuit of additional stimulus measures stands to support risk appetite considering the Eurozone recession represents the most significant headwind facing global growth this year. With that in mind, the bar has been set rather high, meaning the ECB will have a hard time producing a substantively risk-supportive outcome.

Investors have been pricing in the probability of a 25bps interest rate cut this month at over 80 percent since July's ECB meeting. Last week, ECB President Mario Draghi upped the ante, saying that if swelling sovereign risk premia in bond yields disrupt monetary policy transmission, dealing with them falls within the ECB's mandate. On balance, that suggests the markets' status-quo scenario is for a rate cut plus a reboot of the SMP bond-buying program.

Failure to deliver at least this much is likely to carry significant negative implications for risky assets, weighing on growth-geared crude oil and copper prices. Such an outcome will also probably boost haven demand for the US Dollar, producing de-facto downward pressure on gold and silver. To meaningfully boost sentiment (and with it, commodity prices), the ECB will need to come through with added firepower, perhaps announcing another round of 1-3 year LTRO operations and/or a further relaxation of collateral rules to expand banks' access to ECB funds.

WTI Crude Oil (NY Close): $88.91 // +0.85 // +0.97%

Prices are testing support in the 87.65-88.32 area, marked by the July 3 closing high and the 14.6% Fibonacci expansion, with a break lower exposing the 23.6% level at 85.37. Near-term resistance stands at the 90.00 figure, with a push above that targeting the July 19 high at 93.21.

"Crude_Oil_Gold_to_Fall_if_ECB_Stimulus_Falls_Short_of_Expectations_body_Picture_3.png,

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1599.48 // -14.82 // -0.92%

Prices moved lower after putting in a bearish Evening Star candlestick pattern at resistance in the 1620.45-35.70 area. Sellers are now retesting falling trend line resistance set from late March, currently at 1594.56. A break lower initially exposes at 1568.40.

"Crude_Oil_Gold_to_Fall_if_ECB_Stimulus_Falls_Short_of_Expectations_body_Picture_4.png,

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $27.44 // -0.55 // -1.97%

Prices broke back below support at 27.68 after finding resistance at 28.44, the July 3 high. Sellers now aim to retest falling trend line resistance-turned-support at 26.96, with a break below that exposing 26.75 and 26.05. The 27.68 has been recast as near-term resistance.

"Crude_Oil_Gold_to_Fall_if_ECB_Stimulus_Falls_Short_of_Expectations_body_Picture_5.png,

Daily Chart - Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.376 // -0.042 // -1.23%

Prices are testing rising trend line support at 3.342, with a break below that targeting 3.300 and the 38.2% Fibonacci expansion at 3.268. Near-term resistance lines up in the 3.378-90 area marked by the July 10 daily close and the 23.6% Fib. A break to the upside initially exposes 3.445, the 14.6% expansion.

"Crude_Oil_Gold_to_Fall_if_ECB_Stimulus_Falls_Short_of_Expectations_body_Picture_6.png,

Daily Chart - Created Using FXCM Marketscope 2.0

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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