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Could a US dollar rebound prompt a pullback in oil prices?

Overnight we’ve seen the US dollar try and make a fresh move lower which appears to have been rebuffed for now.

The failure to crack $90 on the US dollar index could prompt a short squeeze, which in turn could well prompt a top in the recent rebound in commodity prices.

Source: Bloomberg

This rebound, if sustained could also translate into a short term top for the advance that we’ve seen in commodity prices over the last nine months. A move back above $91.00 on the US dollar index could be the first indication of a possible short squeeze on the short US dollar trade.

Even if the US dollar doesn’t rally strongly there is some evidence given the sharp drop in commodity prices in the last 24 hours that crude oil prices might be a particular area where we may be nearing a short term top. The recent rise in US rig counts along with an expectation that US oil production could well exceed 10m barrels a day in the coming months is one area that could see supply continue to outpace demand.

This may help explain why Brent prices have chopped and changed around the $70 a barrel area over the last few days.

Source: CMC Markets

We can see how this has played out in the chart above when we got a doji star which didn’t get confirmed. Yesterday we saw a sharp bearish reversal after making a new three year high, but thus far we’ve held above the $68.80 level. We need to see a concerted break below this level to increase confidence that a short term top might be in and prompt a little run lower towards $65 a barrel.

The corresponding support level on US WTI crude prices sits at $63 a barrel.

Another factor that could limit the upside for commodity prices is that the Reuters CRB commodity index has continuously struggled to overcome the $196 area which has constrained commodity prices since the June 2015.

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