Dollar Dominance: Commodities on a Tightrope

In the aftermath of the recent policy decisions by major central banks, the global commodities landscape finds itself navigating a shifting tide that is increasingly influenced by the prospect of enduring higher interest rates. This prevailing sentiment has breathed fresh life into the US dollar, propelling it on a path of 11 consecutive weekly gains, thereby exerting considerable pressure on key commodities such as gold, oil, and silver.

US Treasury yields have, in an astonishing rally, surged to levels not witnessed in over 16 years. The 2-year yield currently stands at a formidable 5.149%, while the 10-year yield has steadied itself at 4.558%. This robust performance of the greenback has cast a shadow over the commodity markets, causing the WTI futures (NYMEX: CL) to contract by 1.42% in the opening sessions of the week. Despite the recent tightening of supply, concerns over demand loom large, as evident from this decline.

Yet, amid these fluctuations, some beacons of optimism are visible on the oil horizon. Russia and Saudi Arabia have pledged to continue their voluntary production cuts through the year’s end. This collaborative effort augments the bullish outlook for oil, further bolstered by Russia’s temporary ban on fuel exports to most nations—an action taken to stabilize its domestic market. Furthermore, as China embarks on its golden week holiday starting this Sunday, the potential for increased travel demand could add an exciting twist to the oil price narrative in the days ahead.

Regarding the precious metal arena, the gold spot price has experienced a decline of 0.74% for the week. This dip is a direct consequence of the non-yielding nature of gold, which is now grappling with the spectre of higher interest rates lingering on the horizon. Market sentiment has shifted, pushing the potential for US rate cuts to the summer of next year, further weighing on gold’s allure.

Silver, too, finds itself in a complex web of challenges. Not only is it contending with the looming threat of higher interest rates, but it also faces pressure from a weakened Chinese economy that has cast a pall over industrial demand. This confluence of factors has resulted in a 2.72% weekly decline in the silver spot price.

As we forge ahead, all eyes are on a pivotal event—the forthcoming US PCE Price Index report. Its revelations could prove to be a critical turning point in shaping market sentiment regarding interest rates. This, in turn, will play a pivotal role in determining the directional trend of these commodities in the weeks to come.

Sources: Koyfin, Tradingview

Piece written by Tiaan van Aswegen, Trive Financial Market Analyst

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