Global Themes

Fed policy announcement looms
- Dollar recoups ahead of Fed meeting
- Sterling sentiment remains upbeat
- Output cuts to curb oil price slide?

USD

Dollar recoups ahead of Fed meeting
The US Dollar staged a partial recovery after falling yesterday to a 2-week low against a basket of currencies following the US mid-term election results. Having stretched to 2-week peaks of $1.15 yesterday, EUR/USD lost its momentum and retraced back to where it began the day at $1.1425. Today’s Federal Reserve (Fed) policy meeting at 7:00pm will be another focal trading point in the currency market. The Fed is expected to keep interest rates unchanged at its target range of 2.00%-2.25% and signal a December rate hike. There are no updated forecasts nor is there a press conference, which means the wording of the statement will be closely scrutinised.

According to CME Group data, there is a 75% probability of a hike in December and despite the Fed alluding to five hikes by the end of 2020, the market is currently pricing in slightly less than three hikes. If policymakers hint at a less aggressive tightening schedule over the next couple of years, this could weaken the US Currency as a result. However, in the short term, the dollar has regained a bulk of the lost ground it gave up after the fear of a split Congress sparked a wave of USD selling. This recovery could gain traction if this evening’s meeting offers a hawkish tone, with the Fed reaffirming the need to continue raising interest rates.

Strong economic growth in the US this year has allowed the Fed to raise rates as it has and in turn this has strengthened the dollar. The question now is whether a divided Congress will impede further economic growth policies and put the brakes on future Fed rate hikes?

GBP

Sterling sentiment remains upbeat
The British Pound is holding steady in the mid-$1.31 vicinity against the US Dollar and mid-€1.14 against the Euro. Hopes that a Brexit deal might soon be reached is increasing demand for the pound, which has risen sharply over the past week or so. Yesterday, the European Union’s (EU) chief negotiator Michel Barnier did, however, reiterate that a lot more work needs to be done before a deal can be finalised. Mr Barnier repeated that no deal will be agreed without a resolution for the Irish border and the Irish Prime Minister, Leo Varadkar, warned that the chance of a deal being sealed is diminishing. Yet, despite these downbeat comments, the optimistic mood also floating about is helping the pound shrug off the doubt for now.

The reality is though that Sterling remains vulnerable to erratic price swings as the conflicting Brexit headlines flow out. Several EU official and diplomatic sources have warned that if EU leaders are to endorse any deal with Britain this month then a breakthrough on a Brexit treaty must come within a week (source: Reuters). Sterling’s strength has allowed GBP/JPY to appreciate over 4% in the last seven days, helped by the risk-on sentiment that succeeded the subsiding US election jitters.

GBP/EUR has completely erased its October losses but is now sitting in the higher end of its familiar €1.12-€1.15. Perhaps the currency pair is at risk of a potential reversal on the horizon if Brexit deal hopes fade and GBP/EUR fails to recapture the €1.15 handle.

GBP/USD has clocked a higher daily low over the past five consecutive days, indicating just how bullish sentiment towards a Brexit deal is. However, the currency pair is also potentially at risk if it fails to break cleanly above the $1.32 level any time soon.

Oil

Output cuts to curb oil price slide?
Russia and Saudi Arabia have reportedly started discussions over possible curbs to oil output in 2019 to avoid global oversupply (source: Reuters). The price of oil has been tumbling lately, and yesterday data from the Energy Information Administration revealed US oil output hit a record 11.6M barrels per day last week, contributing to the fall in oil prices.

Norway and Canada, as oil producing nations, have endured the depreciation of the NOK and CAD respectively as a result of the oil price decline. However, the decline has stalled thanks to the possibility of production cuts in the future, which could cap any further losses on these currencies.

A meeting of members and allies of the Organization of the Petroleum Exporting Countries is set to take place on Sunday in Abu Dhabi, which could cause some volatility in financial markets over the weekend.




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