Strong Jobs Data Could Trigger Crude Oil Rebound

This morning, the U.S. government reported that the economy added 204,000 new jobs in October. This beat economist estimates of 125,000 new jobs, sending interest rates higher as investors priced in the possibility the Fed would begin tapering in December rather than in April 2014 like many had priced into the market for several weeks. The spike in interest rates helped the U.S. Dollar rebound after selling off from its high on Thursday. Consequently, the British Pound, the Euro and gold weakened. Crude oil, however, held steady.

The question that investors are asking themselves is whether the jobs report made the Fed’s decision about tapering early easier, or did it create more uncertainty. Today’s volatile price action suggests the latter.

After reaching a low at $93.07 earlier in the week, December crude oil is consolidating, suggesting that it may have run out of sellers. While the fundamentals haven’t confirmed a bottom, the technical picture suggests the market may be ripe for a short-covering rally.

Crude oil failed to react to the stronger dollar this morning, indicating that speculators may have provided support in anticipation of a pick-up in demand because of the improving economy. Combined with yesterday’s release of a bullish GDP report, today’s jobs data suggests the U.S. economy did not lose a beat during the government shutdown like many had anticipated. Although the numbers are not likely to show an improving economy is helping to push up demand yet, the price action suggests that speculators may be willing to step in front of this huge decline and play for a near-term rebound.

The price action suggests that December gold is poised for another meaningful sell-off. Yesterday, the market changed the main trend to down on the daily chart while forming a new lower top at $1326.00. The market is also threatening to take out the Fibonacci support level at $1293.33. This could trigger an acceleration to the downside. The size and duration of the next move will be determined by how confident investors are in the Fed making the decision to taper in December.

The movement in the dollar should give the clarity gold investors need to attack the short side of this market with conviction. If investors believe the Fed is going to taper early then the U.S. Dollar should continue to rally. This should keep the pressure on gold prices. If investors still aren’t sure the Fed has enough information to make a change in policy then gold may stabilize and become range bound. There doesn’t seem to be any clear reason why gold should rally over the near-term.

The rally in the U.S. Dollar helped pressure the Euro almost immediately after the release of the jobs data. While the EUR/USD did turn lower, the selling pressure was not strong enough to take out yesterday’s low. Today’s inside day is a sign of trader indecision.

Technically, the Forex pair is oversold, but the fundamentals aren’t strong enough to change the trend to the upside. There may be room for a technical retracement, but because of the weak Euro Zone economy and the strengthening U.S. economy, it looks like the Euro will not be able to generate fresh buying to take out the recent resistance at 1.3547.

Given the weaker outlook for the Euro and the positive outlook for the dollar, the Forex pair seems to be on a path to reach 1.3100 over the near-term. Since both economies seem to be moving in opposite directions, the weekly economic reports are going to take on greater importance.

The GBP/USD traded lower following the jobs report. This seemed more like a reactive move rather than a developing change in trend. On Thursday, the Bank of England voted to keep interest rates unchanged as well as maintaining its current level of stimulus. Investors were looking for language from the central bank that showed it was considering altering its guidance.

Because of a strengthening U.K. economy, investors have been trying to force the BoE to change its policy about low interest rates. The central bank on the other hand has been trying to talk the currency lower, citing the damage a high priced currency could do to the economic recovery. Look for this battle to continue over the near-term, creating the possibility of volatile trading conditions.

If the GBP/USD is going to feel any pressure, it will be because the Fed is talking tapering while the BoE is pushing for rates to remain low. Once investors become convinced the Fed is set to begin tapering, U.S. interest rates should rise, making the U.S. Dollar a more attractive investment. Until then, the Forex pair may become range bound until one currency gains the upper hand.