Weak Economic Outlook Pressures Crude Oil

April crude oil traded lower on Monday; however the market remained inside of Friday’s range. A trade through $90.04 will continue the massive sell-off taking place since the market topped at $98.65 on February 13. Traders have to be a little careful about selling weakness because of the possibility of a technical bounce following a test of the psychological $90 price level.

Fundamentally, a dramatic drop in the Euro as well as the shedding of higher-risk assets is helping to drive up the dollar. This is leading to a drop in demand for crude oil since a higher-priced dollar makes it more expensive to foreign buyers. The possibility of an extended slow down in the Euro Zone is also weighing on prices.

Last week, the U.S. implemented mandatory spending cuts equal to $85 billion. Even the President was quoted as saying this would slow down the country’s economic recovery. This is another reason for the selling pressure. Investors are bracing for this slow down and accordingly cutting back demand for crude oil.

This morning’s steady U.S. Dollar is triggering a similar move in April gold. Currently, the main trend is down on the daily chart. Based on the short-term range of $1554.30 to $1619.70, the retracement zone at $1587.00 to $1579.28 has become a key pivot area. Building a support base in this zone raises the possibility of a near-term rally.

The biggest bearish influence at this time on gold is the strong dollar. This is likely to continue if volatility in the equity markets and a drop in demand for higher-yielding assets continues. Political uncertainty in Italy could help support gold, but this situation appears to be nearing a peaceful settlement. For that matter, uncertainty of any kind could help gold rally especially if it drives traders out of equities.

After trading down to 1.2966 late last week, the EUR/USD has regained the old bottom at 1.2997. This indicates that the break through the former low for the year was probably driven by sell stops rather than fresh shorts. Investors have gotten used to selling rallies in the direction of the main trend. Based on the short-term range of 1.3161 to 1.2966, traders should look for a rally back to 1.3063 – 1.3087 to attract fresh selling pressure.

Fundamentally, the outlook for a weaker economy and the possibility of an interest rate cut at this week’s European Central Bank policy meeting are weighing on prices. Although the central bank is not likely to cut rates at this meeting, ECB President Mario Draghi is expected to mention the possibility of a cut later in the year during his news conference.

Oversold conditions are leading to a technical bounce in the GBP/USD. The inability to take out last week’s low at 1.4985 drew some short-covering. The main trend is down. This trend turns up on a move through 1.5221. Downside momentum appears to be slowing down, leading to speculation that shorts are getting ready to cover in a big way.

The fundamentals are still supporting a weaker Sterling due to the forecast of slow economic growth, however, traders are uncertain as to whether the Bank of England will apply additional implement to the economy at the central bank’s next meeting. This uncertainty is being used by traders as an excuse to take profits.