Asian Open Dollar Dominance Continues as Bearish Bets Scramble for the Exit

Key Events:

• Hurricane Francine stalls nearly 30% of oil output in the US Gulf of Mexico
• 50 bps Fed rate cut odds rise to 50%
• FOMC Meeting (Wednesday)
• Crude Oil Inventories (Wednesday)
• BOJ Monetary Policy Statement (Friday)
• Chinese Loan Prime Rate (Friday)

 

Source: CME Fed Watch Tool

With the market now pricing in a 50% chance of a 50bps rate cut from the Fed, alongside supply disruptions in the Gulf of Mexico caused by Hurricane Francine, oil is tracing a positive rebound after retesting the strong technical support at the $65 level. Investors are closely watching Wednesday’s FOMC decision and crude oil inventory data for further clues on market direction.

A 25bps rate cut is largely expected and has already been factored into the US Dollar’s charts, while a 50bps cut could break the December 2023 support level for the US Dollar index, potentially boosting oil prices further. Alternatively, if the 50bps cut doesn’t materialize, the FOMC statement will likely be the key driver of market volatility.

Following the FOMC meeting, attention will turn to the Chinese and Japanese economies, with their respective rate decisions having significant implications for oil prices. China’s economic contraction continues to weigh heavily on global demand, while the BOJ’s divergent monetary policy outlook adds to the uncertainty.

Technical Outlook

Crude Oil Outlook: USOIL – 3 Day Time Frame – Log Scale

Source: Tradingview

After retesting the critical $65 support level, oil has sharply rebounded towards the mid-level of its extended channel, moving between the consecutive lows of June 2024 ($72.50) and August 2024 ($71.40), now hovering below the $70 resistance zone.

A 50bps Fed rate cut could further fuel oil’s recovery, pushing it towards the lower end of the consolidation at the $76 resistance level. A breakout above $76 would confirm a stronger uptrend, bringing oil back into its primary consolidation zone.

On the downside, a 25bps rate cut and a more stable outlook, in line with bearish projections for global oil demand, coupled with a break below the $65 support level, could extend oil’s yearly decline towards the $60-$58 price zone.

 

--- Written by Razan Hilal, CMT – on X: @Rh_waves