European shares were painted green on Tuesday even as oil prices extended gains following the unexpected production cuts from OPEC+ on Sunday. However, a sense of caution lingered in the air with US equity futures pointing to a mixed open amid the prospects of higher oil prices fueling fears of higher inflation. In the currency space, the dollar found itself pressured by weak economic data and expectations around the Fed potentially pivoting down the road. Gold struggled for direction while WTI crude ventured towards $81 after surging more than 6% in the previous session.
The next few days promise to be eventful for financial markets thanks to the latest developments concerning OPEC+, with more volatility expected despite the holiday-shortened week. Investors will be presented with key economic data from major economies, speeches by financial heavyweights, and the US jobs report on Friday. The spike in oil prices and renewed fears around rising inflation are likely to spice things up, together with thin liquidity on Friday which could result in whippy price action across the board.
In overnight news, the Reserve Bank of Australia (RBA) left its key interest rate unchanged in April marking its first pause since lifting rates in May 2022. However, the RBA left the door open to future rate hikes in the future to ensure that inflation returned to target. Markets responded by sending the Australian dollar lower across the board.
Are Oil bulls back in town?
Oil prices have certainly kicked off the new quarter on a solid note.
The global commodity extended gains this morning after surging over 6% on Monday following the OPEC+ shock decision to cut production over the weekend. Given how this announcement came just a day after OPEC members indicated that they would keep production policy unchanged, the cartel completely caught markets off-guard. OPEC+ decided to lower oil output by over 1 million barrels per day starting in May as a “precautionary measure” aimed at promoting market stability. Nevertheless, the prospects of higher oil prices in the face of tighter supply could spark fears around rising inflation. In the meantime, WTI has staged a sharp rebound and is currently approaching resistance around $82. A strong breakout and weekly close above this point could open the door toward $90.
All eyes on the NFP report
Friday’s March nonfarm payrolls (NFP) report could play in role in determining whether the Federal Reserve raises interest rates by 25 basis points this month. Expectations are rising over rates reaching their peak with the chances of another 25-basis point move in April currently priced at 67%, according to Fed funds futures. The US economy is projected to have created 240,000 jobs in March with the unemployment rate unchanged at 3.6% and average hourly earnings rising 4.3% year-on-year. A stronger-than-expected report is likely to feed expectations around the Fed cautiously raising interest rates while paying attention to the US banking sector. Alternatively, further signs of a weakening labour markets may fuel speculation around the Fed pausing its rate hikes, before cutting them into the latter part of the year. It will be interesting to see how the Fed reacts to the latest developments concerning OPEC+ and whether this will invite hawks back into the scene.
The dollar has kicked off Q2 on a negative note with the Dollar Index extending losses on Tuesday. Prices remain under pressure with downside momentum potentially taking the DXY towards 101.50 in the short term.
Commodity Spotlight – Gold
Gold struggled for direction Tuesday as oil prices hijacked the spotlight.
It feels like the precious metal could be waiting for a fresh fundamental spark and this could come in the form of the US jobs report on Friday. A stronger-than-expected US jobs report may be bad news for zero-yielding gold, as markets evaluate the possibility of the Fed raising interest rates further. Alternatively, a disappointing NFP report could feed speculation around the Fed pivoting, ultimately supporting gold bulls. Looking at the technical picture, gold has found itself back within a choppy range with support at $1950 and resistance at $2000. Prices are likely to range until a weekly close is achieved above or below the identified support or resistance levels.
