The dollar continues to strengthen after the Fed meeting ended on Wednesday. Fed leaders have confirmed their intentions to start raising rates in March. Fed Chairman Jerome Powell also said that "there's room to raise interest rates without threatening the labor market," because "labor market conditions are already largely consistent with maximum employment." Regarding the accelerated inflation in the US, Powell said that "the Fed's policy will have to react in case of further deterioration of the situation."
At the time of writing, the DXY dollar index has grown since the beginning of this week by 1.8%, adding to the current mark of 97.38, 171 points and returning to June 2020 levels. Even if, closer to the middle of the American trading session, profit-taking begins in long dollar positions, it is obvious that this week, the second in a row, the DXY dollar index will end in positive territory, with a noticeable increase.
The trigger for profit-taking may be the publication of the indices of personal consumption expenditure at 10:30 UTC. In November, household spending increased by 0.5% after the same growth in October, and personal income increased by 0.4% compared to October. The core index of personal consumption expenditures (Core PCE) increased by 4.7% (in annual terms) in November, which is the highest since 1991. This index is the Fed's preferred indicator of inflation and excludes volatile food and energy prices.
Consumer spending in the U.S., as well as the incomes of citizens, are growing, which contributes to the overall economic recovery, while companies are increasing investments. With accelerating inflation, which has reached a 30-year high, other macro data indicate the continuing momentum of the recovery of the American economy, while demand for labor is growing and the unemployment rate is falling.
It is expected that the core index of personal consumption expenditures (Core PCE) increased again in December, by +4.8% (in annual terms). This is a positive factor for the dollar. However, if other articles of the report of the Commerce Department's Bureau of Economic Analysis are not as strong and disappoint market participants, then this may become, as we noted above, a trigger for profit-taking in long positions on the dollar, which may cause its quotes to fall.
Nevertheless, it is probably not worth waiting for a deeper weakening of the dollar. In the current situation, a more correct trading strategy would be to bet on the strengthening of the dollar than on its weakening.
The yield on U.S. government bonds remains high and is in the zone of 2-year highs. Last week, the yield on 10-year U.S. bonds exceeded 1.900%, and today it is 1.836%. The volume of sales of government bonds remains high, while the reduction in the volume of their purchases by the Fed is accelerating, causing an increase in their yield and, accordingly, demand for the dollar.
At the same time, market participants are betting that the Fed may reach a 2% rate level this year, which will further increase the divergence in interest rate curves in the U.S. and other economically developed countries.
Today, participants of the oil market have their attention to the publication of the report of the oil service company Baker Hughes on active oil platforms in the U.S.
Previous data from Baker Hughes reflected an increase in the number of active drilling rigs to 491 units against previous reporting periods. It is obvious that the number of oil-producing companies in the United States is growing again, which is a negative factor for oil prices. Their next growth will also have a negative impact on oil quotes, however, it will only be of a short-term nature.
At the time of writing, Brent crude is trading near $88.20 per barrel. Yesterday, its quotes came close to $90 per barrel for the first time since 2014, after the release of the report from the Energy Information Administration (EIA) of the U.S. Department of Energy on Wednesday. According to the Department of Energy, although commercial oil reserves increased by 2.377 million barrels in the reporting week (analysts expected them to decline by -0.728 million barrels), the total volume of oil and petroleum products reserves in the United States, including strategic reserves, fell to 1.78 billion barrels, the lowest since 2014.
In general, oil market analysts believe that energy prices will remain positive, staying above current levels, and oil prices may rise for the sixth week in a row. OPEC oil production remains below quotas as tensions between Russia, a major gas and oil producer, and Ukraine, through which large volumes of natural gas are shipped, fuel energy prices. In the event of interruptions in their supply, oil prices can accelerate their growth, even if the dollar strengthens further.
Technical analysis and trading recommendations
As noted above, oil prices have risen significantly over the past few weeks, remaining in the bull market and trading above long-term support levels.
At the time of writing, Brent oil futures are trading near the 88.20 mark, remaining in the zone of multi-year highs.
A breakdown of this local resistance level of 89.60 will lead to further price growth, despite the fact that oil market analysts predict that the positive dynamics of the oil market will continue against the backdrop of increased demand for energy and limited oil supplies by OPEC+ countries.
In an alternative scenario and in case of breakdown of the local support level 85.65, the price may fall first to the important support level 82.69 (200 EMA on the 4-hour chart), and then to long-term support levels 77.10 (144 EMA on the daily chart), 74.65 (200 EMA on the daily chart) ).
A breakdown of the key long-term support level 62.00 (200 EMA on the weekly chart) will increase the negative dynamics and the likelihood of a return to the long-term downward trend. The first signal for the implementation of this scenario will be a breakdown of the important short-term support level 86.73 (200 EMA on the 1-hour chart).
Support levels: 86.73, 85.65, 82.69, 77.10, 74.65, 72.60, 62.00
Resistance levels: 89.60, 90.00
Trading recommendations
Brent: Sell Stop 87.55 Stop-Loss 89.65. Take-Profit 87.00, 86.73, 85.65, 82.69, 77.10, 74.65, 72.60, 62.00
Buy Stop 89.65. Stop-Loss 87.55. Take-Profit 90.00, 91.00, 92.00, 93.00, 95.00, 99.00