Crude Oil Continues to Slide

November Crude Oil futures are trading sharply lower after a boost in the U.S. Dollar drove down demand for higher risk assets. Earlier in the session, crude oil prices rose after the Bank of Japan announced additional stimulus measures. Worries about high inventory levels also contributed to the weakness.

Early Wednesday, the Bank of Japan surprised investors by hiking the size of its asset purchases by 10 trillion yen ($126.7 billion) to 80 trillion yen. Fearing that the economy was ready to “level off, more or less”, the central bank felt it had to act now to support the economic recovery.

Supplying the market with additional funds tend to weaken the currency, driving down its value against the U.S. Dollar. As the Greenback rises, commodities priced in dollars become more expensive, leading to a drop in demand. Today’s sharp sell-off took out the August 30 bottom at $94.28, turning the main trend to down on the daily chart.

The stronger dollar is also pressuring the Euro. In addition, renewed concerns that the European Central Bank’s pledge to buy the distressed bonds of member nations won’t provide the long-term solution to the Region’s problems is also weighing on the single currency. The biggest concern is that the central bank will not have enough money to take on debt and jumpstart economic growth.

Technical factors are also weighing on the EUR/USD. The recent rally stopped at a major 50% price level, allowing shorts to build new positions. A new top has been formed at 1.3172, leading to the start of a potential correction to 1.2818.

The GBP/USD has had a volatile trading session, posting an outside move. The recent rally stalled as it approached 1.6300, suggesting overbought conditions. Like the other foreign currencies which rallied on speculation of additional U.S. stimulus, the British Pound also appears ripe for a near-term retracement.

The driving force behind today’s volatility is the release of the Bank of England’s minutes. BoE officials noted that inflation is likely to be stubborn over the near-term leading to the possibility of additional stimulus in the form of asset purchases. Traders may begin to price in additional stimulus for November.

Gold rallied on Wednesday after the Bank of Japan announced additional stimulus. This action follows similar moves by the European Central Bank and the U.S. Federal Reserve, leading to inflationary expectations. With fresh money hitting the global economy, demand remains firm for gold because it is thought of as a store of value during periods of inflation.  

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James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.

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