The Fed’s final meeting for 2016
The Federal Reserve meeting is the main event of the week, and with almost 100% priced in for a rate hike on Wednesday, traders are looking beyond the rate decision. A 25-basis point increase in federal fund rate is completely priced in the dollar, and will be a very big surprise if the central bank failed to deliver.
The dollar index had appreciated by 4% since November 9 to trade at highest levels in more than 13 years, and for the greenback to continue moving higher it requires more than just a rate hike. The dot-plot and Janet Yellen’s press conference are going to be the key on whether dollar bulls can continue pushing higher or a correction is due.
The most recent “dot plot” from September meeting shows another 2 rate hikes are projected for 2017, which is in line with markets expectation, and investors are wondering if these dots are going to move higher when released on Wednesday. Although Mr. Trump played a major role in lifting growth and inflation expectations, I think the Fed won’t change their outlook on this assumption as they don’t want to fall into the same trap they did last year when they projected 4 rate hikes in 2016. The strong rally in the dollar and bond yields are already playing a role in tightening the economy, so the cautious monetary stance is likely to remain until 2017 fiscal plans become clear. Based on that I think the dollar has more chances for profit taking then continuing it upward trajectory.
Other Central banks meeting
The Federal reserve is not the only central bank meeting on the agenda, the Swiss National Bank and Bank of England are also meeting this week. While both central banks are expected to carry current policies into the year ahead, investors are keen to know if BoE’s tone will change. A survey published on Friday showed inflation expectations over the next 12 months rose to 2.8% in November, or 0.6% higher from the previous survey. Although the BoE said previously that they’ll allow a period of somewhat higher inflation, they also said there are limits to that tolerance. If Mark Carney and his team started to show signs of worrisome on current inflation trends the GBP is likely to see renewed buying interest. Before the monetary policy announcement on Thursday, inflation, employment, and retail sales are all due to release in the UK.
Reaction to non-OPEC production cut
After OPEC succeeded in cutting production output on November 30, the cartel managed to convince non-members to cut 558,000 barrel a day for six months on Saturday. Now with 1.758 million barrel expected to be slashed out of the market, or about 2% of the global oil supply starting January 1, oil prices have more room to rally with Brent potentially crossing above $60 in the next couple of weeks. Market’s focus will then switch to the compliance with the agreement, and U.S. shale producers which are not a part of the agreement. U.S. rig counts rose by 21 last week to 498, the biggest increase since mid-2015, and the questions now becomes how fast will US shale ramp up production and at what level is it possible to cap the current rally?