Positive Fiscal Cliff News Underpins Crude Oil

With two weeks to go before expiration, “fiscal cliff” information is likely to have a larger influence on market prices. Over the weekend, House Speaker John Boehner reportedly said he might accept higher taxes on millionaires, in exchange for restraints on spending for programs such as Medicare and Social Security. This positive development underpinned the crude oil market on Monday. 

Time is of the essence as U.S. lawmakers have until the end of the year to reach a compromise regarding spending cuts and tax hikes. If no deal is reached, the economy could fall over the so-called “fiscal cliff”.  In doing so, the U.S. faces the possibility of a recession which is likely to lead to lower demand for energy. The uncertainty facing the market at this is keeping traders on the sidelines and February crude oil prices in a range. 

Uncertainty is also pressuring February gold which traditionally benefits from the same. As clarity begins to emerge from Europe and uncertainty builds in the U.S., money has flowed in the Euro and into global equity markets. Investors are looking at the likelihood of low inflation as well as plenty of liquidity as the driving forces behind the current money flow into equities and one of the main reasons why gold is under pressure. 

The gold charts continue to show a downward bias and given its inability to rally despite a weaker dollar, pressure is likely to remain on the metal unless investors regroup and can drive the market through the recent top at $1725.00. The recent bottom is $1674.50 which makes the psychological $1700.00 level a key pivot. 

Technical factors may begin to exert their influence on the EUR/USD as the Forex pair approaches overbought status. Typically, a prolonged rally in terms of price and time ends with a dramatic closing price reversal top. With the market reaching a new near-term high overnight, traders should watch for a lower close to set up a possible 2 to 3 day correction. 

The market is currently grinding through a series of tops which is putting a bullish spin on the Forex pair. Positive developments in the Euro Zone indicating that the region could be poised for a turnaround have helped to underpin the market, but the threat of the “fiscal cliff” and its negative influence on the U.S. Dollar is most likely the main reason for the Euro’s strength. One can concur that if policymakers avoid the fiscal cliff, the dollar could rise, pressuring the Euro. This is probably the main reason why investors have been tentative on each new high. 

The British Pound has also benefited from the weaker dollar. The Forex pair finished sharply higher on Monday. Traders are focusing on the possibility that a stronger Euro Zone may lift the pressure on the U.K. economy.