Talking Points

• Crude Oil Prices to Rise as Risk Appetite Recovers Before FOMC
• Gold Bounce Likely as Markets Read Dovish Lean in Fed Statement

WTI Crude Oil (NY Close): $92.19 // -1.00 // -1.07%

S&P 500 stock index futures are pointing firmly higher as risk appetite filters back into the markets ahead of the Federal Reserve monetary policy announcement, with crude oil prices likely to follow. Traders are holding out hope that clues of a third round of quantitative easing (QE3) will emerge in the central bank’s post-meeting statement or the subsequent press conference from Chairman Ben Bernanke.

On balance, the prospect of additional stimulus in the near term looks like little more than wishful thinking. The central bank announced the so-called “Operation Twist” at its last meeting on September 21, so it would be unusual to see another change the to the policy mix so soon without allowing adequate time for the current arrangement to prove itself and against the backdrop of seemingly improving performance.

With this in mind, the Fed is likely to stick with a familiar mantra, telling traders that growth remains sub-par while unemployment much too high and reminding them that all options – including QE3 – are still “on the table” if the recovery meaningfully falters. While this doesn’t present any significant change from what has been seen in recently, markets looking for a reason to feel optimistic after two days of brutal selling seem likely to read the outcome as mildly dovish enough to force a short-term rebound in risky assets.

On the technical front, prices formed a Hanging Man candlestick below resistance at $94.87, the 50% Fibonacci retracement barrier, and pushed lower to test support at the 38.2% barrier ($90.17). Support is reinforced by the bottom of a minor rising channel set from the late-September low. A Hammer candle above this juncture suggests a bounce may be ahead before selling resumes. Initial resistance remains at $94.87.

Spot Gold (NY Close): $1719.90 // +5.05 // +0.29%

Not surprisingly, the Fed monetary policy announcement is the central issue at hand for gold prices, for two reasons. First, as discussed above, the outcome has already bolstered risk appetite and seems likely to continue to do so unless Ben Bernanke takes a very unlikely hawkish turn in his rhetoric, which is likely indirectly to bolster the yellow metal via a decline in the safe-haven US Dollar. Second, the dovish-leaning interpretation that is likely to be taken up by investors even in the case of generally unchanged rhetoric keeps alive the threat of another expansion in the Fed’s balance sheet, which feeds demand for gold as an inflation hedge (if only temporarily).

The technical landscape seems to reinforce the case for a short-term bounce. Prices completed a bearish Evening Doji Star candlestick pattern below support-turned-resistance at $1745.15. Sellers have been stalled at the $1700 figure, the former range top established in late September and midline of a rising channel. A Hammer candle here hints at a near-term loss of bearish conviction and suggests a bounce back to 1745.15 may be ahead before the push lower resumes. Alternatively, a break below $1700 exposes the 23.6% Fib extension at $1660.81.

Spot Silver (NY Close): $33.32 // -0.98 // -2.86%

As with gold, silver’s fate over the coming 24 hours rests on the Federal Reserve monetary policy statement, with the path of least resistance seeming to favor the upside as the markets read a dovish lean into the policymakers’ rhetoric. A bearish Evening Doji Star candlestick pattern marked the beginning of a decline to support loosely defined at the $33.00 figure, which coincides closely with the 38.2% Fibonacci retracement and 14.6% extension levels. Near-term resistance remains at $35.12.

— Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

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