Markets Lay Low Ahead of the FED

The US inflation was published despite the government shutdown in the US and was a bit softer than anticipated, which had caused the immediate bullish reaction of Gold, stock indices, and pushed down the US dollar index.

The reaction was, however, limited, as volatility remains low across the board. VIX dives below 16, confirming the bullish trend narrative, though without any substantial participation from big capital, as volume falls since October 10 for S&P 500 index futures, and since October 17 for Gold futures, according to the statistics from the Chicago Mercantile Exchange.

Traders are preparing for the publication of the US interest rate on Wednesday, October 29th, and the press-conference of Jerome Powell. Usually, he provides a softening effect on markets with a positive sentiment, so given the overall dovish expectations from the FED and a moderately bullish sentiment, we can expect markets to resume the pullback ahead of the FED’s meeting and beyond.

The Nasdaq and overall tech sector get overbought against the financial sector, so one possible scenario for the week is a rotation between techs and financials (in favor of financial stocks): some of this dynamics was already displayed last week, and it may extend to the week ahead.

Crude oil had returned to $60 and above, reacting to sanctions imposed by Donald Trump on the largest Russian oil producers. That creates uncertainty in the energy markets, as around 500 to 600 thousand barrels per day is expected to be eliminated from the oil market, according to Bloomberg.

So, the global record surplus pressure might be compensated for by the effects of sanctions. At the same time, Kuwait’s prime minister said that OPEC is prepared to increase production if demand requires it. So, current upward pressure for Crude oil futures might be amplified by short coverage, though the overall bearish trend remains intact.

Let’s dive into the charts of Crude oil and Gold and try to highlight major scenarios for the week ahead.

USOIL

Crude oil had reached the 50-day moving average, driven by sanctions for Russia, and creating some bullish flow amid some short coverage, as open interest for crude oil futures has been declining steadily since October 15. The effect seems temporary, as the global record surplus expectations skew expectations for lower price levels.

Thus, we may expect some rotation around the achieved level with some volatility around it. One should be careful with upside breakouts, as they have greater odds of being false, unless any game-changing news reaches the market.

XAUUSD

Gold is consolidating after the large sell-off, which was also the biggest daily decline for more than a 10-year period. As the asset was deleveraged, it’s not expected to continue quickly moving up, though in case it generates the upside breakout, it may turn down, as shown in the chart, as the bullish price action might be vulnerable now after the liquidation.

Though everything will depend on the geopolitical situation, as Gold acts as a protection against political statements and current market volatility.

If there were no drivers behind the bullish action, it would probably slide down further in case the retest of the upper border of the chart formation were false.