US to drive gold and oil movement

It all depends on the US.

The outlook for commodity prices all depends on the Federal Reserve.

After its meeting last week Fed members revised up their growth and inflation forecasts and their expectations for when interest rates will rise, however Fed governor Ben Bernanke sounded more cautious.

He expressed concern that the recent recovery in growth may not be sustainable. So far economic data has painted a mixed picture.

Surveys on manufacturing activity have done well but the unemployment picture has been more mixed, which has kept commodity investors in a cautious mood.

The US economic data is important for commodity markets because the economy will determine whether or not the Federal Reserve does more quantitative easing or not.

If the economy strengthens and job growth picks up again then the Fed may not do more QE.

This could boost the value of the dollar and weigh on commodity prices like oil and gold, which move inversely to the direction of the dollar.

In contrast, if the economic data starts to weaken, especially the labour market data, then we could see more QE from the Fed, which tends to be positive for commodity prices.

The Brent crude oil price has been fairly weak since peaking in March at $125 per barrel.

Since then it has fallen below $120 a barrel as Eurozone sovereign concerns weigh on the market.

We believe that Brent could trade lower if 1, there is a sharp deterioration in the Eurozone sovereign debt crisis or 2, if the dollar has a sharp up-swing.

We think that both of these things could happen in the medium-term. $115 per barrel should act as good support.

Gold is range-bound for now and hasn’t been able to move back to test the $1,700 highs. $1,630-$1,615 is a key support zone for the yellow metal as below here is the start of a long-term technical downtrend.

You need to watch the US economic data to determine when commodities will break out of their recent ranges.

The writer is Emea Research Director at FOREX.com

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