Wednesday FOMC statement included a $15 billion monthly cut from its current quantitative easing programs starting this month. Nothing out of the ordinary was noticed. Coming up today is its counterpart in the UK and of course, the OPEC+ meeting.
What did FOMC conclude?
On Wednesday, the Fed Reserve was hawkish about the US economy stating that most of the sectors that were beaten by the pandemic have enjoyed significant recovery as a result of the progress in vaccination. However, the last outbreak especially the delta variants has slowed recovery down a bit. On inflation, the bank maintained its stance that the supply-demand imbalance that followed the reopening of the economy continues to put pressure on retail prices. While the future course of the economy still largely depends on the virus, the bank maintained a bright outlook, hoping vaccines will continue to provide a safety net. In the end, the bank decided to exercise a $15 billion monthly taper of its current stimulus tools.
How did the dollar react?
No excitement from the greenback. The 15 billion cut was largely expected and a lot of the November taper has been priced in, in the past weeks. However, there was an instant drop as the inflation barrier discouraged the market from an earlier rate hike timeline expectation. Meanwhile, as expected in our Wednesday pre-FOMC preview, the dollar should maintain the bullish run with the index most likely aiming for 95 in the coming days especially if the job reports on Friday are better than estimates.
Dollar Index Forecast
The last week’s surge from 93.25 ended the previous 4-weeks bearish correction and suggested the year-long bullish run will continue. 93.25 and 93.5 will continue to provide support. In as much as price stays above these levels, the more likely direction is to the upside. A break above 94.25 could be followed by a persistent rally toward 95. This means the dollar has one more chance of dominance over its peers. Market’s next focus is on the Friday NFP and unemployment rate reports.
OPEC+ to maintain supply discipline as demand cools
The oil market is about to close its first losing week in two months as the raging demand for energy products stabilizes or cools off a bit. Amid slower demand, the US crude oil inventories continue to rise for the sixth straight week with a build of 3.594 million barrels announced on Tuesday by the American Petroleum Institute on Tuesday. Tuesday’s report was far bigger than analysts’ estimates of 1.567 million barrels which thus put pressure on the oil market and led to the biggest decline since late August.
OPEC+ is expected to maintain the 400,000 BPD as agreed in its last meeting despite oil importers’ call for more supply in the past weeks. The cartel will most likely not make any additions on the agreed extra supply neither will it pull the plug as a result of the current supply-demand balance.
Has the oil price peaked in the current bull cycle? Are investors all out for a massive sell? There is no clear indication that supply is sweeping off demand for oil products. In many countries, inflation remains high as a result of setbacks in transportation thus limiting supply. Therefore, the demand for oil will increase further in the coming weeks. Aside from this, the current US crude inventory is still about 57 million barrels below the levels at the start of the year and much lower than the pre-pandemic level. Shortage of demand is not yet a major concern and the big players will most likely long the energy products further.
WTI Crude Technical Analysis
WTI hit $85 on 25th October – the highest price in 7 years. As the chart below shows, the bullish trend remains intact – not yet broken unless a fast di below 77.15 previous high happens. The price is aiming for the 5th primary wave projected to hit $90 per barrel.
The 4th primary wave ended at $61.68 after which the black Gold rose over 33% to $85.32. The current dip is corrective and can be taken as the 4th intermediate wave of the 5th primary wave. It seems the raging bullish trend is in the last stage. Further push from here toward $90 is very much likely. We will most likely see higher oil prices reflect on petro-currencies especially the CAD again.
What happens to CAD if oil jumps again?
The CAD has been the strongest major currency since late October – largely pushed by the fast oil price rise.
CAD index above shows the recent decline has been influenced by the current oil price corrective decline. A push higher should happen in the coming days especially if the Friday CAD job reports beat estimates. CADCHF and CADJPY bullish trends can then resume as well as the EURCAD bearish run. USDCAD can be less trendy as a result of the strong dollar although the pace of the CAD has been much stronger in the past weeks.
BoE rate hike to rescue Sterling?
Coming an hour before the New York session is the BoE interest rate statements and monetary policies. The bank has come with some recent hawkish comments. The bank is expected to maintain the current 0.1% rate but recent comments from Governor Bailey suggest waiting till December before raising rates might not happen. There seems to be a sense of urgency. Thus, some sections of the market look forward to a 15 basis point rate hike that could take rates to 0.25%. GBP pairs had some good run on Wednesday, probably expecting or pricing in a rate hike statement today.
The Pound Sterling Index remains in the 5 years range – since the effect of the 2016 Brexit referendum. At this point, the currency either jumps to the roof of the range or breakdown to the floor. Something big seems to be coming and the next direction will most likely define a sustained trend for the next 1-2 weeks before another reversed move. Will the BoE trigger the next run?