Commodities Provide Boost Ahead of Fed and BoJ

US equity markets are expected to get the week off to a good start, supported by higher commodity prices, but attention will inevitably be on Wednesday with two major central banks set to announce their latest policy decisions.

It doesn’t help that we’re lacking any notable economic data or events today and tomorrow isn’t looking much more thrilling. That said, markets are looking spritely with a heavy dollar and commodity gains sparking some life into what could otherwise have been a fairly slow day. The softening in the dollar comes following some strong gains on Friday on the back of stronger CPI inflation numbers.

Asia treads water ahead of “Big Wednesday”

While the CPI measure may not be the Fed’s preferred measure and may have come too late to influence the outcome on Wednesday, we could see a corresponding uptick in the Fed’s preferred PCE measure which could in turn increase the chances of a hike in December. The market implied probability of a hike on Wednesday remains very low at 12% while December has risen to 55%.

FedWatch

Source – CME Group FedWatch Tool

This does not mean the Fed will not raise interest rates on Wednesday of course, but it does suggest the chances are slim as the Fed will not want to unnecessarily rock the boat and has clearly not done a good job of preparing the markets for such an outcome. The weaker recent jobs report and retail sales data has also given the Fed reason for caution in the lead up to the meeting.

Equity markets are getting a lift from gains across commodity markets today, helped in part by a drop in the dollar but also by reports of a deal to stabilise production and issues with Libyan exports. I think it’s worth taking any reports of a deal to stabilise output with a pinch of salt given the recent ability of OPEC alone to agree to such a thing, let alone one that involves OPEC and non-OPEC members, but the fact that Venezuelan President Nicolas Maduro has claimed it is close does appear to have got people’s attention. I remain sceptical at this stage, especially as Saudi Arabia only recently suggested a freeze isn’t necessary.

EUR/USD – Euro Ticks Higher, Shrugs off Weak Current Account

Oil is also being technically supported with Brent and WTI both trading around one month lows having caught a bid around the same level they did at the start of September. That’s not to say we won’t see them come under further pressure, this could easily be nothing more than a dead cat bounce, but $43 in WTI and $45.50 in Brent are clearly significant support levels. It may take something significant to drive prices below these levels.

For a look at all of today’s economic events, check out our economic calendar.

Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.