Oil Bullish Rally Stalls at Key Resistance

Jan 29, 2021 06:47 PM ET
Oil Bullish Rally Stalls at Key Resistance
  • Key Forex Fundamentals (Events data) remain the driving force for the performance of WTI crude oil. 
  • US dollar anticipation heightens in the wake of January's consumer confidence index and meeting of the Federal Open Market Committee.

Crude Oil demand depends on the supply volume of consumer goods. If people in the United States are going to demand more goods, industries will order more oil.  A country such as Canada, for example, depends solely on exports. 

Most of its goods are exported to the US. Therefore, if the demand is high, industries in Canada have to order more oil - hence increasing oil prices. And as a result, pulling down the value of the USD/CAD pair. When the demand for consumer goods is low, the demand for oil goes down, which increases the price of the CAD. 

Presently WTI Crude oil is consolidating momentum after its bullish rallies stalled at a key resistance area.  The area of resistance is marked by the 76.4 % Fibonacci retracement level of last year's primary move.  OPEC appears to be on the right side with its pledged oil output supply. However, the prolonged delay of the Covid-19 vaccine and the US Fiscal Stimulus Package are negatively affecting the prices of oil. 

CFDs on WTI crude oil

WTI crude oil and the USD/CAD pair

USD/CAD traders are warned to remain wary of oil's prevailing price performance. This is because oil and the USD/CAD pair have a negative correlation of approximately 93% since 2000. Nonetheless, this correlation has been withering off since 2016.  

But note USD/CAD usually goes down when oil goes up. Take a look at this correlation on a comparison chart between USD/CAD and Oil performance.

In case crude oil breaks lower from the resistance, the negative correlation suggests USD/CAD will correct upwards. USD/CAD has fewer chances of correcting upwards if oil continues with its bullish momentum.  But then, what are the driving factors for USD for the remaining week of January? 

Major events catalyzing the US dollar's price action include a meeting of the Federal Reserve policy (Wednesday), Core PCE results on Friday, Q4 Adv GDP data on Thursday, and the Consumer Confidence Report from today.

Consumer confidence report (January 2020)

The US Consumer Confidence Report (January 2020) shared a more promising outlook than expected.  The index rose from 126.5 in December 2019 to 131.6 in January, which represents a 3.6 difference from a Dow Jones index expectation of 128. According to this month's consumer index, the figure stands at 89.3. A number it hasn't seen for nine months. A higher index reading than expected serves as a positive/bullish sentiment for the US dollar. At the same time, a lower reading speculates bearish patterns.  Traders can anticipate an upward price correction since the consumer index improved from 84.4 in December to 89.3 in January. 

Additionally, factors exist that are helping maintain the price stability of crude oil in the US. Such factors are also weighing on demand for the US dollar. These include global lockdowns, anticipation for a Covid-19 vaccine rollout, and the US fiscal stimulus.

Presently, the channel formation (acted as support and resistance since November) has encapsulated WTI's price action.  

Simultaneously, the Moving Average Convergence Divergence (MACD) is playing around the zero-line; and the 76.4% Fibonacci retracement is providing support around 5162.3. All factors are indicating the chances of an upward price correction any time from now.

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