Trading insights: US Dollar takes the lead, gold, oil slip

Market insight talking points:

• US 100, S&P 500, Dow Jones 30 struggle against the greenback, vix rises.
• USD/JPY climbs to a 10 - month high, with resistance forming at 148.00
• Oil threatens monetary policy, gold and silver retreat

US 100, S&P 500, Vix, Dow Jones overview

The US 100, S&P 500 and Dow Jones 30 returned from the US holiday weekend with little enthusiasm, which caused the major stock indices to sacrifice a slight portion of recent gains. With a stronger greenback and weak economic data weighing on risk assets, stocks eased, driving the majority of global stock indices lower.

As US100 and the S&P stepped back from their relative levels of psychological resistance (15500 US100 and 4500 for the S&P spot contracts), a few sectors were able to withstand the geopolitical headwinds.

With Tesla gaining over 4.69% off the back of reports that deliveries of the electric vehicles out from the factory in Shanghai China, Airbnb and Blackstone received a boost from Friday’s news that the two companies would be as components of the S&P.

Additionally, the rising oil prices had a positive impact on the stock prices of energy prices, allowing the energy sector component of the S&P 500 to end roughly 0.5% higher on the day.

Going into today’s session, the Vix (the fear index), has increased by another 1.28%, adding to the 7% gain yesterday. Although the VIX is currently trading 8.40% higher on the week, it is still down by 38.54% (YTD).

Vix (S&P 500 fear index) chart

Source: TradingView

Do oil prices pose a direct threat to monetary policy?

Oil prices have been rising consistently over the past three-months, fuelled by diminishing supply and production cuts. With the price of the Brent futures (UK oil) increasing by an impressive 17% since June, WTI (US crude) futures have gained 19% during the same period.

The key factors contributing to the three month rally include:

• Saudi Arabia production cuts
• Russia output cuts
• Declining stockpiles
• Concerns regarding the BRICS expansion and what it means for Western nations (Australasia, America and Europe).

In Monday’s analysis, we discussed the possibility of extended voluntary cuts in October and what it would mean for oil prices and monetary policy. With Saudi Arabia and Russia confirming that the respective 1 million bpd and 300,000 bpd output cuts will continue for the duration of the year, the threat that this poses on global inflation becomes a valid concern.

As the majority of global central banks continue with their efforts to bring inflation back to the objective target of 2% through aggressive monetary tightening, lower energy prices have played a major role in taming inflation over the past year.

Source: Federal Reserve of Dallas

However, with interest rates increasing at a rapid pace, signs of a global economic slowdown are becoming more apparent (disappointing PMI manufacturing and services PMI, declining levels of consumer confidence and a slowdown in the labour market), raising the potential for a global recession.

Fed speak overshadows gold/silver’s appeal

For gold and silver, the precious metals hold a reputation as a hedge against inflation and as a safe-haven asset. Although the current economic conditions may appear favourable for XAU/USD and XAG/USD, from past experience, it seems that high interest rates do not bode well for non-yielding assets (gold, stocks and tangible cryptocurrency tokens).

With Federal Reserve Governor Waller leaving the door open for one more rate hike in the foreseeable future, the central bank has reiterated that rates are expected to remain at current levels until price pressures ease and inflation falls back to the objective target of 2%.

As higher rates continued to drive treasury yields higher, the US dollar index marched on, pushing gold futures back to the 50 - day moving average, providing resistance around the $1,950 mark. For spot gold (XAU/USD), a move below the 50 - day MA pushed prices back to the $1,924 critical zone that has historically provided both support and resistance for gold prices.

Gold daily chart

Chart prepared using TradingView

Not only has USD strength weighed on gold and silver prices, it has also had a negative impact on stocks and currency pairs who have an inverse relationship (an increase in one variable causes a decrease in another variable and vice versa) with the greenback. For USD/JPY, the interest rate differentials have been supportive of USD appreciation, which has had a significant impact on the Japanese Yen.

USD/JPY weekly chart

Chart prepared using TradingView

As differences between the Fed’s aggressive monetary tightening and the Bank of Japan’s ultra-loose policy remain the prominent driver of price action, USD/JPY hit a 10-month high of 147.818 in early hours of trading, just short of key psychological resistance at 148.00.

If prices rise above this level, it is possible for buyers to push prices back toward the 150.00 handle, a break of which opens the door for a potential retest of the October 2022 high of 151.945.

Looking Ahead

Looking ahead, today's major risk events include:

• Bank of Canada (BoC) rate decision (14:00 GMT)
• ISM services (PMI) - 14:00 (GMT)