Week Ahead: Oil and USD bulls seek confirmation
This coming Thursday’s OPEC+ meeting and Friday’s US nonfarm payrolls stand out among the lineup of potential market-moving events in the coming week:
Monday, June 28
- Fed speak: New York Fed President John Williams
- European Commission’s summer economic forecasts
Tuesday, June 29
- Fed speak: Richmond Fed President Thomas Barkin
- ECB President Christine Lagarde speech
- Germany CPI
- Eurozone economic confidence
- US consumer confidence
Wednesday, June 30
- UK GDP
- Germany unemployment
- Eurozone CPI
- US ADP jobs
Thursday, July 1
- China Caixin manufacturing PMI
- OPEC+ meeting
- BOE Governor Andrew Bailey speech
- Eurozone unemployment
- Manufacturing PMI: US, Eurozone, UK
Friday, July 2
- ECB President Christine Lagarde speech
- Eurozone PPI
- US nonfarm payrolls
Let’s start with the keenly awaited OPEC+ decision due 1 July regarding their output levels.
As things stand, markets are expecting this coalition of major oil-producing nations to increase their production by a collective 550,000 barrels per day in August. Even if that output hike were to be implemented in August, using current projections, that would still leave global markets in a deficit of around 1.5 million bpd (barrels per day).
Such a tightening supply-demand equation has spurred oil prices upwards, with Brent earlier this week reaching its highest levels since October 2018, while the futures contracts are set to wrap up a fifth consecutive weekly gain.
Drawing upon the price action from May 2018, the $80/bbl level offered formidable resistance back then, and a bullish surprise from OPEC+ on 1 July could trigger another test of that psychologically-important region once more.
Still, Brent oil has enough technical reasons to pull back in the coming sessions. Brent’s relative strength index has broken into overbought territory and also breached the upper Bollinger band on the weekly chart.
An output hike that's significantly larger than the anticipated 550k bpd could be the catalyst for unwinding some of oil’s recent gains, though prices should remain well supported by the brightening global demand outlook.
Strike 3 for US NFP?
And with the first Friday of the new month comes the US nonfarm payrolls report.
Recall that the last two monthly prints have disappointed markets. Note that, at the time of writing, economists are forecasting 695,000 jobs were added in June.
Another underwhelming US jobs report could prompt the dollar to unwind more of its post-June FOMC meeting gains, as it buys the Fed more time before having to ease up on its asset purchases. The downward pressure could bring the USD Index’s 100-day simple moving average as the next area of interest.
Conversely, a better-than-expected nonfarm payrolls report could see this USD Index testing its 200-SMA as a resistance once more, with the Fed’s latest dot plot still fresh in the minds of market participants.
After all, FOMC members have pencilled in two US interest rate hikes in 2023, pending further improvements in the US labour market. If the June NFP delivers on that narrative, dollar bulls could come charging in once more.