Oil Soars as the Dollar Plunges - Forex News

Oil Soars as the Dollar Plunges - Forex News

Most investors are well aware of the immutable relationship between the United States dollar and oil as a commodity. We have now once again seen the principle which dictates that what goes up will inevitably fall (and vice-versa). In late-breaking news, the prices of oil have skyrocketed due to rumours that OPEC may have reached what is known as an output cap agreement with Russia. An output cap is (essentially) the difference between the actual production and the maximum potential output (1). In other words, OPEC and Russia have both agreed to place a freeze upon the production and output of oil.

What does this mean for the short-term Forex trader?

Dollar-Based Woes Ahead

This move by OPEC has only placed further strain upon the dollar in relation to other currencies such as the EUR, the GBP and the JPY. One has to consider whether or not this was a well-timed press release intended to coincide with the fact that the United States Federal Reserve appears to be hesitant to raise interest rates.

To put this another way, it seems as if the dollar has experienced what can only be called a one-two punch during the past few days. Was this move perhaps influenced by Russia? It would not be entirely out of the question to speculate that the recent release of durable goods figures triggered such an action from these oil producers.

Considering that WTI prices climbed from $44.60 to $46.50 dollars in a matter of hours, the reaction of the dollar should not have been a surprise to any seasoned Forex trader. From a broader perspective, this rise signals a distinct change in the short-term momentum of this currency. The big question is whether or not oil will continue to rise.

Oil Predictions for the Remainder of 2016

Considering recent events, it would be irresponsible to attempt to accurately predict the price of crude oil per barrel between now and the remainder of 2016. Instead, it is important to look at the fundamentals that will continue to play an important role. Decreased imports into the United States, a flagging European economy, doubts regarding the impact of the Brexit and Asian GDP concerns should continue to weigh heavily upon the confidence levels of Forex investors. Oil aficionados will likely take a similar stance. As a result, we can fully expect to witness a more risk-averse attitude unless situations suddenly reverse.

Time for the Doves to Fly?

There is no doubt that a more dovish stance has been taken during the last few weeks; perhaps first initiated by the decision of the Federal Reserve to keep interest rates at their current levels. Although the predominant sentiment amongst commodity investors is not likely to change, there could be a very real opportunity here for Forex enthusiasts.

Forex profits are based off of the inherent liquidity of such a malleable market. Recent plunges in the value of the dollar only highlight this fact. To be sure, experienced traders likely hedged their holdings soon after the durable goods data was made public. Some may have even been waiting for the "other shoe to drop". In this case, the financial shoe would have likely been the oil output cap. It could be argued that now is an excellent time to buy into the dollar. This stance would be taken by those who feel that a support level is not far off in relation to other major currencies.

The other side of the coin is more centred around the looming Fed decision in November. Should interest rates remain the same or even decrease, we could be in for a very bearish winter indeed. The simple fact is that as of yet, such speculations are still too far ahead for most currency traders.

Proaction or no Action?

Forex traders who are keen on taking short-term profits may be very interested in becoming involved in a USD/EUR or USD/GBP position. This is naturally assuming that the dollar will experience intermittent rebounds. As this is a highly speculative stance, it is always best to employ the forex tools at CMC Markets to keep well ahead of any news that may quickly affect any currency position.

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