Crude Oil Rallies with Gold Prices as Markets Entertain a Less Hawkish Fed After BoE QE

Crude Oil, WTI, BoE QE, British Pound, Federal Reserve – Talking Points:

• WTI crude oil rallies alongside gold prices and the S&P 500 on Wednesday
• After the BoE temporarily restarted QE, markets lowered Fed rate hike bets
• Are markets setting up for disappointment? WTI bounced, but SMAs eyed

WTI crude oil prices rallied 5 percent on Wednesday in the best daily move in over 4 months. Its climb was not an isolated event, however. Multiple assets rallied across financial markets over the past 24 hours in a synchronized systemic move. Looking at the chart below, we can see that oil gained alongside gold and S&P 500 futures. This is as the US Dollar, and crucially, UK 30-year government bond yields fell.

You can summarize the chart below with two words, “risk-on”. Clearly, something major happened in markets that caused traders to improve their moods. As has been the case of late, the market-moving event originated in the United Kingdom. Despite the highest inflation in decades, the Bank of England effectively restarted quantitative easing, at least temporarily and in a limited amount.

The new-bond buying program is to the tune of 65 billion British Pounds for long-dated Gilts. The pace is about 5 billion each day until October 14th. This follows the new government’s fiscal proposal, where stimulatory measures where announced such as tax cuts. This means that fiscal and monetary policies are heading in counterintuitive directions. The markets punished the Sterling as it briefly hit a record low on Monday.

So, what does this have to do with crude oil? The commodity is closely linked to the swings of the global business cycle. Following the BoE’s action, global government bond yields fell, even in the United States. This reflected a dovish shift in monetary policy expectations. Markets went from pricing in almost 2 Fed rate hikes in 2023 to less than 1. Less hawkish central banks could decrease global growth slowdown bets.

What could this mean for oil over the remaining 24 hours? Well, if Asia-Pacific markets extend Wall Street’s rosy session, ten WTI could be in for another positive day. Down the road, Fed policymakers might be questioned again about the possibility of a pivot or perhaps a measure like what the BoE pulled off. This could set crude oil up for disappointment.

Crude Oil Rallies Alongside Almost Everything Overnight

Chart Created Using TradingView

Crude Oil Technical Analysis – Daily Chart

On the daily chart, WTI has pushed higher for a second consecutive day after bouncing off the 78.6% Fibonacci retracement at 76.787. Still, WTI remains below the 20- and 50-day Simple Moving Averages (SMAs). The latter may hold as key resistance, maintaining the broader downside focus. Confirming a breakout under the 78.6% level exposes the 61.696 – 65.6 support zone which has its beginnings in May 2021.

Chart Created Using TradingView

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or@ddubrovskyFXon Twitter