USOIL Helped to 2023 High by its Golden Cross & Fed, China Optimism

USOIL Analysis

The commodity had the wind in its sails last week and cruised to the highest levels in nearly a year, helped by a series of supporting news. Jobs data from the US showed that that, although still tight, the labor market is coming into better balance. According to Friday's report, unemployment jumped to 3.8% in August and the highest level in one and a half years. The economy gained 187,000 jobs, which beat forecasts, but still was one of the smallest additions in nearly three years.

This bolstered bets for a pause by the Fed at this month's meeting and expectations that the terminal rate has been reached. PCE inflation may have ticked up in July, but investors appeared to view it as a benign increase.

Fears around China's beleaguered property sector were aggravated after Country Garden posted a massive loss for H1 2023 and warned of a default ^[1]. However, authorities stepped up their efforts to boost the real estate market, with measures including lower rates for existing mortgages. ^[2]

A few days earlier, USOil had formed a Golden Cross (50Days EMA>200Days EMA), which is often viewed as precursor of sustained strength. Along with optimism for a Fed pause and improved mood around China, the commodity posted its best week since March. The new 2023 highs have brought 90.36 in its crosshairs, but we remain cautious around how much further it can go at this stage.

The move looks exaggerated as the Relative Strength Index (RSI) reached very overbought levels. USOil is cautious today and a correction towards the EMA200 (80.00) would be reasonable. Daily closes below it would threaten the momentum, but strong catalyst would be needed for that. Markets may believe that the Fed is done hiking, but their optimism have proved misplaced before and Chair Powell has kept more hikes on the table. China tries to prop the faltering recovery, but its actions still appear to be conservative.