Gold Long-Term Consolidation

Gold prices have spent considerable time consolidating within a prevailing downtrend and horizontal support level as the precious metal increasingly approaches a breakout. The confluence of weaker inflation and a stronger dollar have seen gold prices broadly decline over the medium-term with $1140 still the major level to watch on the downside for any potential breakout. However, over the last week, a curious factor happened that dramatically changes the outlook for gold prices. The dollar and gold which have a historically strong inverse correlation started moving vastly independent of one another. There are a number of reasons this could have occurred, but the most obvious explanation is that speculators in the paper market are pushing prices in the opposite direction compared to physical bullion purchases. While gold prices are presently recovering from Friday’s spectacular drop, this move could signal more volatility over the week with the approaching FOMC interest rate decision, rate statement, and preliminary GDP estimates for the American economy.

There are two patterns that presently define the trajectory of gold prices from a technical perspective. On a longer-term basis gold prices are trending lower, consolidating within a descending triangle pattern that typically exhibits a bearish bias. This multi-year consolidation should not be ignored as it is setting up for a possible downside breakout that could see gold prices trend towards $1050 and $950 over the medium-to-long term if completed.  Taking a look on a more medium-term basis, the head and shoulders bearish pattern setting up in the instrument since November is also bound by similar support at $1,140 per troy ounce. After the complete formation of the left shoulder and head, the right shoulder is materializing. While both technical patterns see the risks firmly biased to the downside, it will take a fundamental announcement to push momentum lower over time. The key long-term support evident at $1,140 is the level to watch as any break could signal substantial downward momentum.

USDJPY Downward Trending Equidistant Channel Formation

The Japanese Yen carry-trade is one of the most important barometers of risk sentiment for the global economy aside from precious metals and equities. With Japanese interest rates near record lows for over a decade, many traders have used the Yen as a funding currency for other trades due to its relative cheapness. On the whole, “Abenomics” which has targeted 2.00% inflation via an epic quantitative easing program, has fallen short of expectations and seen real macroeconomic data sour as a result. The Bank of Japan Press Conference and Monetary Policy Statements on Thursday will likely confirm that the Central Bank under the stewardship of Haruhiko Kuroda will push the inflation target back by nearly a year as lower energy costs impact the outlook. Although unemployment to be released Friday is forecast to stay constant at 3.50%, slumping retail sales and the downward correction in core CPI figures are widely expected to cause the Yen continue to appreciate as the Central Bank encounters headwinds to reflating the economy.

The USDJPY pair has been trending in a downward trending equidistant channel pattern for nearly one-week as deteriorating US fundamentals coupled with worsening Japanese metrics push the pair lower. Even though risk-sentiment in equities remains unfazed after US benchmarks hit record highs last week and the Nikkei 225 managed to close over 20,000 for the first time in 15-years, the move lower in USDJPY could signal the beginning of a larger correction to the downside underway. With a wide array of macroeconomic data releases expected from both the US and Japan, the pervasive underperformance relative to expectations for data points makes the downward channel relevant as a trading strategy. Ideally, the best way to exploit the weakness is short positions at the upper channel line to be closed at the bottom of the channel. Long positions at the bottom of the channel are not preferred due to the worsening risk characteristics. Any unexpected surprises regarding US GDP or the FOMC Statement could see a breakout in USDJPY if there are material changes to the outlook.

WTI Crude Oil Ascending Triangle Technical Pattern

Crude oil prices continue to trade in ignorance of the fundamental backdrop as the war drums beating in the Gulf outweigh production and inventory concerns. With Saudi Arabian production not far off record highs and continued expansion of Iraqi and Libyan production, the oversupply problems remain as the OPEC majors fight for market share.  If a nuclear deal is reached with Iran by the deadline, this could also see the supply-side problems mount for oil producing nations as the nation eagerly resumes oil exports to make up for lost revenues. However, despite the rising global production levels and weaker demand, prices have remain elevated as the unfolding situation in Yemen creates concerns of a possible hostile takeover near one of the globe’s key seaborne oil routes. An overnight resumption of the aerial and naval bombardment campaigns saw tensions rise once more as Saudi Arabia prepares for a potential ground invasion.

The epic rebound in oil prices after hitting multi-year lows in March is notable considering growing inventories and dwindling storage capacity. The latest EIA and API crude stockpile data from the United States shows that production has barely budged despite the plunge in prices over the last 6-months, instead climbing to multi-decade highs as producers ramp up output to offset the slump in revenues. The uptrend in West Texas Intermediate crude oil that remains intact from the 18th of March has been stopped in its tracks by resistance at $57.90. Although there have been several tests of resistance, the instrument has been unable to close above the level, stressing the increasingly narrow consolidation between the two levels. Any ground invasion, drawdown in inventory figures this week, or pullback in production could be the impetus for higher prices.  However, a break of the uptrend line could be the reversal to the downside fundamental analysts have been waiting for as prices correct swiftly in reflection of the supply and demand constraints.