A sense of caution and unease continues to linger across financial markets this morning as jittery investors brace for the Federal Reserve’s interest rate decision later in the day.
Global equity markets are poised to remain turbulent for the rest of the week thanks to global growth fears, lingering trade concerns, Brexit turmoil and heightened political risk in Europe. With geopolitical risk factors not only fuelling market pessimism but also placing investors on an emotional rollercoaster ride, hopes for a Santa Clause rally seem to be fading by the day.
UK CPI to offer short-term distraction from Brexit
The Pound’s fortunes clearly remain tied to the outcome of the Brexit vote in Parliament during the week of January 14.
However, November’s pending CPI report could offer a short-term distraction as investors re-direct their attention back to fundamentals. Inflation in the United Kingdom is expected to cool to 2.3% from 2.4%. Signs of easing inflationary pressures will be seen as a welcome development for consumers, especially when considering how average earnings have increased by 3.3% - their highest level in 10 years.
In regards to the technical picture, Sterling bulls have been clearly in the driver’s seat in recent days despite Brexit uncertainty and political instability in Westminster weighing on sentiment. A weaker Dollar is clearly the primary driver behind the GBPUSD’s upside and this continues to be reflected in price action. Although the GBPUSD could push higher in the short term, gains remain capped below the 1.2700 resistance level.
Dollar shaky ahead of Fed meeting
Today’s main risk event for financial markets will be the Federal Reserve’s highly anticipated monetary policy announcement this afternoon.
With a rate hike in December already heavily priced in, investors will be more concerned with the policy statement, dot plots and press conference for clues on the Fed’s hiking path next year. While it seems quite unusual for the Federal Reserve to raise interest rates in such unfavourable global market conditions, recent economic data such as GDP, US housing starts and unemployment suggest that the US economy remains solid. With Fed policy makers expressing a more cautious tone in recent weeks, expectations remain elevated over the Federal Reserve moving forward with a ‘dovish hike’. The Dollar has the potential to depreciate further if the line ‘further gradual increase’ is omitted from the statement and the dot plot projections from September are revised lower from three to two for 2019.
Commodity spotlight – WTI Oil
Oil prices were under extreme selling pressure yesterday as risk aversion compounded with oversupply fears and concerns over weaker Oil demand.
WTI Crude collapsed like a house of cards with prices sinking to a fresh yearly low of $45.77, while Brent fared slightly better with prices hovering around $60 as of writing. With markets struggling to find signs of Oil market stabilizing after OPEC and Russia’s deal to cut production by 1.2 million barrels per day and global growth fears worsening matters, the outlook for Oil remains fundamentally bearish. In regards to the technical picture, WTI Crude is unquestionably bearish on the daily and weekly charts. The downside momentum is likely to send prices towards $45 in the near term.