Dollar up, Oil down – Eyes on US CPI

The US yields pushed higher and the dollar rally gained further momentum yesterday, as investors continued to surf on the idea that Donald Trump’s pro-growth policies and tariffs would boost inflation in the US and limit the Federal Reserve’s (Fed) capacity to ease the monetary policy as much as previously anticipated. Yesterday’s data showed an improved economic optimism in the US in November. The US 2-year yield, for example, which best captures the rate expectations, is up by 85bp since the September dip, we could see a similar jump in the US 10-year yield. Minneapolis Fed President Neel Kashkari said that he’ll be looking at the inflation data to decide whether he would back another rate cut in December. And activity on  Fed funds futures gives no more than 62% for another 25bp in December, before the release of the latest US CPI update today.

Inflation regains importance

The CPI data has regained importance since Donald Trump was re-elected President of the US. Jobs data remains crucial for the Fed’s policy path, as the last thing the Fed wants is to panic and lose control of the situation, but the Fed’s victory over inflation looks more vulnerable today than it did a month ago. And that’s supportive of the US dollar.

Of course, October figures won’t tell much about the Trump effect on consumer prices. We must wait a few months before we start seeing the impact of Trump on numbers. But the higher the numbers, the lower the December cut expectations. And I sense that today’s numbers may not sooth the doves’ nerves: the US headline inflation is expected to have climbed from 2.4% to 2.6%, while core inflation is seen steady near 3.3% - still significantly above the Fed’s 2% policy target. Any upside pressure in figures should continue to drive capital into the US dollar. But the US dollar has hit the overbought market conditions following a 6% rebound since the beginning of October. Therefore, any weakness in the data could help tame demand in the short-run, trigger a minor correction and give the US dollar bulls opportunity to strengthen their bullish positions for the year end. Voices calling for a further slide of EURUSD toward parity are growing.

But wait! The US dollar’s strength will likely hit a speed bump, and the initial rally will probably continue at a lower speed, because the USD appreciation, and other currencies’ depreciation, will boost inflation expectations in the rest of the world and lead to a slower-than-otherwise easing in other central bank rate policies.

Still, the US dollar outlook is comfortably bullish at the moment as there is room for a further retreat in dovish Fed expectations.

Oil under pressure

The barrel of US crude is testing the $68pb offers to the downside on sluggish Chinese, global demand, ample supply from non-OPEC countries, and the absence of fresh tensions from the Middle East. Add to that the fact that OPEC cut its oil demand forecast for  fourth consecutive month this week, and you have a comfortably bearish picture in crude oil.

In numbers, OPEC expects the global oil consumption to increase by 1.8 mbpd in 2024 – just under 2%. And it’s more optimistic than many bank forecasts, Aramco’s own forecasts and roughly the double of the IEA’s estimation. The latter will release their latest report on Thursday.

Under these circumstances, the oil bears keep control in their hands. Trend and momentum indicators remain comfortably bearish, the RSI indicator isn’t close to overbought market conditions – meaning that there is room for the selloff the extend in the short run, and the $70/71pb range – that shelters the minor 23.% Fibonacci retracement and the 50-DMA – is crowded with offers. The major upside risk (besides geopolitical risks) is another delay to the end of OPEC production restriction plans. I see that coming big as a mountain. But that decision will certainly not come before the 1st of December, at OPEC’s next scheduled meeting, unless we see an accelerated meltdown in oil prices that would necessitate an early announcement from the cartel. For now, price rallies are interesting top selling opportunities. Solid resistance is seen into $70/71 range and the key resistance to the actual negative trend stands at the 72.85pb level, the major 38.2% Fibonacci retracement on the summer to now selloff.

The downside pressure in oil prices weigh on oil company valuations, but the downside in oil companies’ share prices remain limited by optimism that Donald Trump loves oil companies and will want them to pump and sell as much as possible to lower energy prices. Exxon for example is trading near $120 per share, a few dollars below an ATH level defying weaker oil prices.

But note that, even though oil giants are happy to see oil-friendly Donald Trump take the reins of the US, they prefer price over volume and Exxon’s CEO even said that Trump shouldn't bail on the Paris climate deal and doesn't see a big near-term boost in US oil output.