Economic signals are positive, but interest rate decisions have a greater impact on oil prices

Oil prices rallied on the back of positive US jobs data easing economic concerns. The US Labor Department reported a sharp drop in jobless claims, indicating a resurgent job market. Despite positive economic signals, oil markets remained cautious due to the potential impact on the Federal Reserve's interest rate decision.

(One-hour chart of crude oil prices)

foreign exchange trading platform"Talk of an imminent US recession seems outrageous," said the chief market strategist.BlackRock also agreed with him, saying fears of a US recession were overdone. The asset manager believes the US jobs report for July is more in line with a slowdown than a recession. BlackRock noted that US job creation is slowing, but has averaged 170,000 jobs over the past three months; consumer spending, while cooling, remains relatively healthy. Second-quarter corporate earnings have so far beaten expectations.

US non-farm payrolls rose by 114,000 in July, well below the previous value of 179,000. Traders are betting on a 70 per cent chance that the Federal Reserve will cut interest rates by a steeper 50 basis points than usual after a poor jobs report quickly heightened fears of a US recession. However, the market now believes the chance of a sharp rate cut when Fed officials meet in September has dropped to 58 per cent.

Initial jobless claims fell by 17,000 to a seasonally adjusted 233,000 in the week to Aug. 3, the lowest level in 11 months, according to the latest data from the Labor Department. The figure fell short of economists' predictions of 240,000. Last week's data showed an unexpectedly sharp rise in initial jobless claims, a welcome reversal.

However, economists cautioned against reading too much into the latest jobless claims report, meaning the Fed could still cut interest rates sharply.

Jeffrey Roach, principal analyst at LPL Financial, said: "Investors have to be careful not to read too much into a report, as they did recently with the last jobs report. If the data deteriorates rapidly from now on, the Fed could act more decisively in September, cutting rates by 50 basis points.

Marc Chandler, chief market strategist at Bannockburn Global Forex, said that the oil market is now more focused on the state of the US economy and has largely ignored supply and demand fundamentals. Therefore, it may not be a bad idea for Republican candidate Trump to be re-elected as US president. Last Thursday, Trump said that the US president should have a say in the decisions of the Federal Reserve, in his clearest hint that he could violate the independence of the Federal Reserve if he returns to the White House.

That said, Trump's influence over the Fed's decisions is likely to yield only short-term gains. Economists point out that such a path could lead to a repeat of what happened under Fed Chairperson Burns in the 1970s. Before the 1972 election, Burns was pressured by then-President Nixon to maintain expansionary monetary policy despite evidence that inflationary pressures were building. As a result, by 1974, US inflation had soared to 12%, a problem that persisted for a decade until Fed Chairperson Volcker sharply raised interest rates, triggering two recessions in the early 1980s.

Despite the positive economic signals, the oil market remains cautious due to the potential impact on the Federal Reserve's interest rate decision.