Talking Points

  • Crude Oil, Copper Likely to Follow Stocks Lower as Fed Withholds QE3
  • Gold and Silver to Decline Amid Receding Demand for an Inflation Hedge

All eyes are on the Federal Reserve monetary policy announcement as global economic growth concerns retake the spotlight from fears of a sudden rupture in the Eurozone after the weekend's pro-bailout outcome to the Greek general election. With Europe expected to sink into recession while Asia sees its slowest growth since 2009 (according to a survey of economists polled by Bloomberg) this year, traders are looking to the US to offer a counterbalance.

With US Treasury yields already near record lows, the likelihood that more QE can generate a substantial increase in lending seems implausible. Meanwhile, Ben Bernanke has explicitly said it would be very reckless to seek a pickup in economic activity at the expense of higher inflation, meaning a QE3 program that amounts to little more than a confidence-building exercise is unlikely.

Still, US economic data has increasingly underperformed over the past two months, meaning a reboot of the so-called Operation Twist - a scheme meant to target a reduction in long-term borrowing costs in place since late September - and perhaps another extension of the time period within which rates are pledged to be kept low seems appropriate.

On balance, this would amount to a reinstatement of the status quo considering Operation Twist is due to expire this month. With markets pining for accommodation, this is likely to disappoint investors and drive risk aversion, sinking growth-geared copper and crude oil prices. Gold and silver are also vulnerable amid receding demand for precious metals as a store-of-value hedge against dilution of paper currencies.

WTI Crude Oil (NY Close): $84.03 // +0.76 // +0.91%

Prices continue to tread water between the 23.6% Fibonacci expansionat 81.07 and the June 7 high at the 87.00 figure. A break higher initially exposes 90.14. Alternatively, a push through support targets the 38.2% expansion at 77.34.

Crude_Oil_Gold_at_Risk_as_Federal_Reserve_Disappoints_Stimulus_Hopes_body_Picture_3.png,

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1618.52 // -9.55 // -0.59%

Prices pulled back to retest the 61.8%Fibonacci retracementat 1616.23, a barrier reinforced by former resistance at a falling trend line set from early March. A break below here exposes the 1600/oz figure. Near-term resistance remains at 1637.35, the 76.4%Fibonacci retracement, with a break above that exposing the May 1 high at 1671.49.

Crude_Oil_Gold_at_Risk_as_Federal_Reserve_Disappoints_Stimulus_Hopes_body_Picture_4.png,

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $28.43 // -0.29 // -0.99%

Prices continue to trace out a Flag chart formation, a setup indicative of bearish continuation. Confirmation is required on a daily close below the pattern's bottom - now at 28.37 - which would expose 27.06 as the next downside objective. The first layer of major resistance lines up at 29.71.

Crude_Oil_Gold_at_Risk_as_Federal_Reserve_Disappoints_Stimulus_Hopes_body_Picture_5.png,

Daily Chart - Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.434 // +0.038 // +1.12%

Prices took out resistance at 3.384, the 23.6% Fibonacci retracement, with the bulls now aiming to challenge the 38.2% Fib at 3.474. The 23.6%retracement has been recast as near-term support, with a break below that

Crude_Oil_Gold_at_Risk_as_Federal_Reserve_Disappoints_Stimulus_Hopes_body_Picture_6.png,

Daily Chart - Created Using FXCM Marketscope 2.0

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

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak