Crude oil dismissed the EIA report on commercial reserves, which showed a decline of 6.3M barrels, exceeding the forecast of -2.2M barrels. Prices lost more than 2.5% on Friday, as Russia ruled out the possibility of further production cuts, while the general strategy of the American oil industry’s struggle for market share remains offensive. Oil prices in this case will be the main tool in the search for equilibrium in which production in the US will stabilise and the markets will be able to move to search for catalysts for growth, freeing themselves into bearish sentiments.
The previous report of Baker Hughes, which showed a reduction in rig count for the first time since January, may signal that prices have almost reached the bottom in which further growth in the US production may not be profitable. Investors are likely to shift their focus from supply to demand, acting on news of the recovery of the global economy (and hence global demand) and upbeat comments from ECB representatives on the reduction of monetary stimulus. ECB President Mario Draghi’s speech at the ECB forum allowed prices to win back some of the losses.
The US currency declined after the release of the NFP report. The US economy added 222K jobs beating expectations for an increase of 178K, but the growth of wages disappointed the markets and the Fed. Last month, wage growth was downwardly revised to 0.1%, whereas in July the growth was 0.2% with a forecast calling for 0.3%. Unemployment rose from 4.3% to 4.4%, which gives an additional argument to the Fed’s “doves” to start reducing the asset balance only in December. Weakness of the report suggests that the dollar lost all major growth drivers and will now start to decline against the euro, while the ECB officials feel much more confident in their bullish projections. The target for the EURUSD pair is 1.15 – 1.16 for next week.
Statistics on manufacturing production in the UK disappointed, undermining speculation that a weak pound will make UK goods more competitive, which in turn will increase the production orders in the country. The trade deficit in the country increased, indicating a decrease in exports, while production growth was only 0.4% in May, with a forecast of 0.9%. This gives even more reason to the Bank of England “hawks” to believe that the economy needs to lift rates, since exports seem unable to compensate for the negative effects of developing inflation. However, the pound is likely to test the support level of 1.2700 – 1.2750 first, and then rise higher before the meeting of the Bank of England in August.
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