WTI Crude oil in holding pattern until Fed

Markets are a bit groggy on the first day of the week that traders have been looking forward to for months. In case you’ve been living under a rock, you’ll want to mark Thursday with a big red star on your calendar; that’s when the Federal Reserve will meet to decide whether it’s time for “lift off” on interest rates. As it stands, Fed Funds futures contracts are pricing in just a 25% chance of a rate hike on Thursday, according to the CME Group’s FedWatch tool. We agree that the central bank is more likely to hold off, but wouldn’t be shocked if the FOMC decides to pull the trigger, given the strength in the labor market.

Whatever the Fed decides, volatility is likely across all global markets later this week and one market that may be poised for a particularly big move is West Texas Intermediate (WTI) crude oil. The commodity has been consolidating in a tight descending triangle pattern for the past two weeks, and as of writing, the pattern’s range has contracted to just $2.00, so a breakout seems likely sooner rather than later.

As a general rule of thumb, this pattern has bearish implications if the bottom of the triangle (near 43.00 in this case) is broken, but with a busy slate of fundamental data on tap this week, an upside breakout cannot be ruled out. Astute traders will monitor the corresponding triangle pattern on the RSI indicator as a possible leading indicator for a breakout in the exchange rate itself.

If the Fed does opt to hike interest rates, it should benefit the US dollar and by extension, drive WTI lower – in that case, a breakdown and drop back toward key psychological support at 40.00 could be in the cards. On the other hand, a more cautious Fed could support oil for a possible rally; a move above the top of the triangle pattern could open the door for a recovery toward the early September highs in the upper-40.00s.

Beyond the FOMC meeting, WTI traders should also keep an eye on tomorrow’s US Retail Sales, Industrial Production, and Capacity Utilization reports, as well as the UK jobs report and US CPI on Wednesday as possible catalysts for a breakout this week.

Source: FOREX.com