Dollar on standby as markets brace for Fed

1 May, 2019

Asian stocks got off to a subdued start this morning as financial markets in the region were mostly closed for the holidays.

The mood across global markets has been mixed in recent days, as investors closely monitor US-China trade talks currently taking place in Beijing. Should the negotiations conclude on a positive note with both sides finding a middle ground on trade, this will be a welcome development for equity markets as risk appetite makes a return.

European markets are positioned to trade within a modest range today as investors adopt a wait-and-see approach ahead of the US Federal Reserve’s monetary policy decision. This caution is likely to trickle down into Wall Street which closed mixed yesterday as revenue declines in Alphabet and Apple weighed down tech stocks.

Dollar waits for Fed rate decision

The past few trading days have certainly not been kind to the Dollar, despite US GDP growth figures for the first quarter of 2019 smashing market expectations last week.

A touch of caution ahead of the Fed’s rate decision and the US jobs report scheduled for release at the end of the week could be one of the factors behind the Dollar’s recent depreciation. The Federal Reserve is expected to leave interest rates unchanged today, despite Donald Trump’s recent call for the central bank to cut rates. With the recent, stronger-than-expected US economic growth figures clashing with sluggish inflation, it will be interesting to hear Jerome Powell’s thoughts on this topic. If Powell sounds move dovish than expected, expectations may mount over a potential rate cut by the end of 2019 – something that is seen to be exposing the Dollar to downside risks.

Focusing on the technical picture, the Dollar Index (DXY) is under pressure on the daily charts. Dollar bears have the chance to re-enter the driving seat if a solid weekly close below 97.50 is achieved.

Commodity spotlight – WTI Oil

The explosive movements seen in Oil prices continue to highlight how sensitive the commodity remains to news revolving around anything to do with supply and demand-side factors.

This was showcased last week, after Oil prices sprinted to fresh 2019 highs on the news of the US ending waivers on Iran sanctions, only to later surrender all gains following news that Trump said he called OPEC to increase output. Regardless of recent declines, Oil prices have the potential to rebound on concerns over possible supply shocks in the near-term. The prospects of roughly 1 million barrels per day removed from the international Oil markets will most likely fuel speculation of tightening conditions, especially when factoring OPEC-led supply cuts since the start of the year and production disruptions in Venezuela and Libya. Although OPEC+ can fill the void by dipping into spare capacity, it may end up leaving up markets exposed to unexpected supply shocks given the geopolitical risks.

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