Europe to open slightly lower as oil rebound falters

CMC Markets

After a strong rally on Friday the US dollar slipped back a touch yesterday, while equity markets, particularly in Europe saw a strong rebound helped in no small part by a sharp rally in oil prices, after comments from Venezuelan President Maduro that OPEC and non OPEC members were closing in on a deal to stabilise the oil market, after meeting Iranian President Rouhani at the weekend.

While oil markets rallied sharply it’s not hard to escape the feeling that we’ve been here before and after finishing last week lower, conditions were ripe for a short squeeze in the oil price. What seems more likely is that President Rouhani told the Venezuelans what they wanted to hear, ahead of next week’s unofficial gathering in Algeria, as any agreement without having the Saudi’s on board simply would not work, while US producers continue to add to the weekly rig count.

This may help explain why oil prices having been up over 2% at one stage yesterday soon slipped back off their highs, bringing US markets back down with them, as a dose of realism took over, and traders realised that what Venezuela wants doesn’t matter that much, and that the market still remains significantly over supplied.

Venezuela’s problems by and large are self-inflicted given their oil production has dived to 13 year lows, due to power shortages and chronic underinvestment. The problem for Venezuela is not the price; it is that they’ve allowed other producers to fill the gap; their slide in output, incompetence and underinvestment has created. It is for this reason that Venezuela’s pleas for a production freeze is likely to fall on deaf ears and that we’ll probably still be having this conversation after next week’s gathering.

Today’s European open is likely to see a slightly softer open after yesterday’s paring back of oil prices from their intraday highs, as well as the fact that the latest Federal Reserve rate meeting gets under way later today.

While Fed fund futures still only assign a 20% likelihood of a move on rates tomorrow, there is speculation that debate about a move is likely to be fairly robust, with the prospect that we could see further dissent on any decision, which means that any post meeting comments from Fed chief Janet Yellen are likely to be as important as the decision itself.

Before the Fed meeting concludes we also have the latest Bank of Japan rate decision which takes place Wednesday morning, and where we could see some further tweaks to their current negative rate policy, as well as the bond buying program.

What is clearly becoming self-evident is that the Bank of Japan is reaching the limits of its effectiveness and tomorrow’s market reaction to what they do is likely to be a key weather vane leading up to tomorrow’s Fed decision.

EURUSD – the euro has managed to hold above the 200 day MA, as well as the key support area near the 1.1120 area for now. A move back through the 1.1220 area retargets the 1.1300 area while a move below 1.1120 retargets the low 1.1000’s.

GBPUSD – the pound managed a modest rebound yesterday but needs to see a move back through the 1.3120 level to stabilise or run the risk of a retest of the July lows at 1.2815, with next support at 1.2910.

EURGBP – while below resistance at the 0.8620 area the risk is for a return to the 0.8480 area. If we fall below 0.8480 then we could see a return to the 0.8420 area.

USDJPY – continues to drift lower with resistance now at the 103.00 area, as well as the 103.50 area. This keeps alive the prospect of a move towards the recent lows around the 99.50 area. A move through 104.00 could well see 107 quite quickly.

CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.