Market analysis: Oil and the pound sag: an overview of the markets by Gaurav Kashyap

Crude oil dropped to seven-month lows this week as a deepening global supply glut continued to rattle investor sentiment. Dubai Gold & Commodities Exchange (DGCX) West Texas Intermediate crude contract for July delivery traded as low as 43.03 and is down more than 10 per cent this month. The sluggishness in crude prices is hardly surprising, considering the boost in US shale production and the continuous expansion in US drilling activity – data compiled from Baker Hughes showed that US drilling companies added rigs for a 22nd consecutive week and this will undoubtedly see stockpiles build up in the weeks ahead. The Opec deal last month has seen Opec members stick closely to the 1.8-million-barrel daily cut, however ramped up production from nations like Nigeria and Libya seem to be offsetting such efforts. Technically, a break of the 44.30 levels has exposed the next support level established in November 2016 following the flash sale in which Crude hit 43.04 levels. While crude is consolidating just above these levels currently, a comprehensive break would expose 41.25 in the weeks ahead.

The other big loser in the month has been the British Pound. Following PM May’s election on June 8, the British Pound has fallen more than 2.75% against the US Dollar. PM May’s failure in establishing a majority in the house has shaken Pound longs and the cross has almost fully covered the April 18th rally, the day which May announced the snap election. Following the confirmation of the vote, GBPUSD opened at a lower gap, through our initial band of 1.275 to 1.28 shared last time and our next target of 1.25 looks good to be achieved in the days ahead. Pound bulls would be wary and take note of the lack of traction following the Bank of England’s recent rate decision. There were no changes in the QE program at 435b Pounds or the interest rate at 0.25%, but the voting split of the MPC was particularly interesting as 5 voted in favour of holding and 3 voting to increase. This was up from one in the previous month – and despite this surprise the Pound ran out of steam at 1.28 levels. The downside momentum was compounded this week when BOE Governor Mark Carney in a prepared statement said that Britain isn’t ready for higher interest rates and that wage growth is to weak to justify a rate hike. So despite the balancing in the MPC at 5-3, it seems Carney would not be lending support to the three hawkish members just as yet. The political uncertainty surrounding the implications of this recent election will equate into economic risk and this will continue to erode sentiment in Pound positions. While upsides will be capped at 1.28 going forward, we expect to see short opportunities towards the downside in GBPUSD with 1.21-1.23 a very strong support level through the summer months.

Because of the ongoing Pound weakness, EURGBP has been a big benefactor and has achieved our initial target with consolidation occurring above 88 levels. We maintain our long views, shared last time for the next upside target at 0.90 levels through the summer months.

The US Dollar also has remained within our range of 96.50 and 97.90 through June and has come in for a bit of support through the latter half of June. The most recent FOMC meeting didn’t surprise markets to say the least – as expected the central bank increased rates to a band of 1.00%-1.25% - and maintain their stance for one more hike in 2017. The dovish hike saw downgrades in the inflation projections to 0.2% with little to noticeable changes in the unemployment and GDP rates. The Fed are seemingly shrugging off a run of cooling US numbers in Q2 and instead expect to see a turnaround in the data docket through Q3. What this means is a heightened level of focus in the key US figures – inflation, employment & GDP – and again, improvements in these core figures will lend support to the US Dollar and US treasuries.

Gaurav Kashyap is the head of futures at EGM Futures

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