Currencies
EUR/USD – the USD is weakening ahead of the FOMC interest rate decision, as some are cautious on the USD as there are a lot of questions surrounding what the FOMC will do. Not really regarding the question if they will increase the interest rate, such a move is highly anticipated, but more on the outlook and the dot plots. In case the interest rate will not be increased, we can expect a very sharp reaction and weakening of the USD.
USD/JPY – is in a holding pattern at the moment as it waits for the FOMC rate decision. We can see that at the moment the resistance around the 115.82 level is too much and the USD needs another boost to break through this level, which the FOMC could do. On the other hand, we could very well see a buy the rumour sell the fact occurring, especially if the FOMC statement and projections are not hawkish enough. The data out of Japan was less than expected, but overall still showed and improvement. Nevertheless it wasn’t enough to really impact the JPY.
GBP/USD – inflation in the UK is picking up steam due to the weaker GBP since the Brexit vote. While initially strengthening the GBP, the GBP lost ground versus the USD in the end. The fast increase in inflation is likely to create a headache for the BOE, although the overall relatively solid performance of the economy is alleviating this somewhat. In order to combat high inflation, the BOE could obviously increase the interest rate, but that in turn could further negatively impact investments and economic activity and hamper growth. On the other hand, lowering the interest rate means inflation will increase further, but in turn should lead to more economic activity and spur growth. It is therefore expected that the BOE will decide to not change the interest rate tomorrow and wait to see how things develop.
USD/CAD – remains trading around the support already for the entire week as we can expect that this will change today after the FOMC rate hike decision, projections and the following FOMC statement.
USD/RUB – is dropping sharply over the last few days, which is part was due to the rising oil price, but is also due to the perceived better political situation that Russia is expected to be in when Trump enters the White House. This is further reinforced with the appointment of Rex Tillerson as the US Secretary of State, someone who has good connections to Russia and also to Russia’s President, Vladimir Putin.
Indices
Dow Jones 30 – the Dow Jones is edging closer and closer to the magical 20,000 level.
S&P 500 – as mentioned yesterday, it was only a question before a new record high would be reached, and it did yesterday what it wasn’t able to do the previous day and that is to set a new record high.
Commodities
Gold – is able to find some short-term support around the 1157 level, and could hold on to that level as we approach the FOMC statement. After that it is all a question of how hawkish the FOMC is in its dot plot projections and how it sees the economy performing in 2017. A hawkish outlook with multiple rate hikes could send gold firmly lower, although we have already seen quite a consistent drop in recent weeks. On the other hand, if the outlook remains modest we could see a nice bounce in gold prices. We will know at 19:00 GMT.
Oil – continues to move further down, especially after the API crude stock showed a large build of nearly 4.7 million barrels, while a drawdown was expected. The EIA inventories is also forecast to show a draw of -1.6 million barrels, so if that number comes in close to the API data, it is a build instead of a draw and a significant one as well, further putting pressure on oil prices. Furthermore we will wait to see if US producers increased production. On the other hand, the EIA does foresees that the oversupply will turn into a deficit in the first half of 2017 if the OPEC and also non-OPEC countries stick to the agreements. It will still take a long time for a real oil deficit to come into effect, as the inventories are still very, very high. To add more doubt whether or not OPEC will stick to its own agreement is the fact that OPEC produced a record number of barrels in November of 34.2 mbpd. That means that 1.7 mbpd needs to be cut to reach the quota, the big question is, will that happen?