The emergence of signs of a warming US-China relationship and rumors that central banks and governments will not allow the global economy to slide into recession forced the Brent and WTI bears to take profits. In the second half of the summer, they dominated the market due to concerns about declining global demand. The trade war led to the worst dynamics of industrial production in China over the past 17 years and put the German economy on the brink of a technical recession. Oil is hard to go up when the biggest consumers look so bad. However, everything changes in the market in a matter of moments, and those who previously dragged any asset to the bottom can very quickly give rise to its growth.
The slowdown in the Chinese economy forced the People's Bank to lower its base rate and leave the door open to further weaken monetary policy. In Germany, the topic of increasing government spending is being actively discussed. According to the German Minister of Finance Olaf Scholz, the country needs a fiscal stimulus of at least € 50 billion. It is good news for black gold. But if Berlin launches tax reform or increases government spending, keep in mind how Rome will begin to demonstrate your discontent. Italians cannot afford the same thing because of an excessive budget deficit, which is contrary to EU standards. As a result, rumors about the country's exit from the eurozone may begin to circulate; Not the best news for the euro. The fall in EUR/USD quotes can launch a new wave of sales in the Brent and WTI markets.
The dynamics of the US dollar and oil
The theme of a strong US dollar could be another important driver for oil. According to Boston Federal Reserve President Eric Rosengren, the US does not need to lower the federal funds rate. The Fed should not look at other countries but should focus on its own economy. Indeed, the lowest unemployment over the past half-century, as well as acceleration of core inflation to 2.2% and GDP growth above 2% create the prerequisites not for easing, but for tightening monetary policy. The American economy is able to get a new impetus for growth. On the eve of the 2020 elections, the White House is considering the possibility of lowering taxes for the middle class, including payroll taxes. If this idea comes true, no matter how Donald Trump wants, the US dollar will strengthen.
The President is well aware that the USD index is growing, including concerns on the trade war. Hence, he recently decided to take a step back. We are talking about changing the timing of the introduction of new tariffs, as well as prolonging the grace period for Huawei Technologies, which has a beneficial effect on oil.
Technically, Brent could enter a state of short-term consolidation in the range of $57.45-61.35 per barrel. A break of the upper border activates the "Bat" pattern and will increase the risks of quotes growth to $66.3. On the contrary, a successful test of the lower border of the trading channel will allow the "bears" to count on the implementation of the target by 161.8%, according to the AB = CD model.
Brent daily chart
