Crude Oil drops to 5.5-month low as US Dollar recovers ahead of FOMC

Dicey markets are in fashion as traders await the Federal Reserve (Fed) monetary policy announcements. The previous day’s mixed prints of US inflation data intensified anxiety on the floor while concerns surrounding geopolitics and China allowed the US Dollar to edge higher, despite the downbeat Treasury bond yields.

Given the firmer US Dollar, prices of gold drops to a three-week low while declining for the fourth consecutive day whereas Crude oil slumps to the lowest level since late June. Further, AUDUSD declines the most among the G10 currency pairs followed by the NZDUSD. That said, EURUSD stays pressured as ECB talks hint at dovish bias whereas GBPUSD bears the burden of a downbeat UK data dump.

Wall Street closed on the positive side and helped the US stock futures edge higher. However, equities in the Asia-Pacific zone drift lower amid a lack of confidence in China policymakers’ optimism and mixed data from India. Further, hopes of strong price pressure in Japan and Australia also prod the risk takers.

Elsewhere, BTCUSD and ETHUSD hold lower grounds amid receding optimism on the crypto front ahead of spot ETF approvals.

Following are the latest moves of the key assets:

• Brent oil drops to the lowest level since June, extending the previous day’s heavy fall to $72.80 by the press time.
• Gold price licks its wounds at a three-week low, indecisive near $1,980 at the latest.
• USD Index reverses the first daily loss in three by printing mild gains to around 104.00 as we write.
• Wall Street closed positive but Asia-Pacific stocks edged lower. Further, equities in the UK and Europe remain dicey by the press time.
• BTCUSD and ETHUSD print mild losses to around $41,000 and $2,170 at the latest.

US Dollar edges higher ahead of Fed’s verdict…

US Dollar Index (DXY) picks up bids to reverse the previous day’s pullback, the first in three, as US CPI data struggles to push back the Fed rate cut bias. That said, the headline US inflation gauge, namely the Consumer Price Index (CPI), matched market forecasts of printing 0.1% MoM and 3.1% YoY figures versus 0.0% and 3.2% respectively. Further, the CPI ex Food & Energy, also known as the Core CPI, proved right the analysts’ estimations of printing 0.3% monthly and 4.0% yearly figures compared to 0.2% and 4.0% priors in that order. Additionally, the US NFIB Business Optimism Index for November remained mostly unchanged at 90.6 from 90.7 prior while the Federal budget deficit widened to $314 billion for the said month compared to October’s print of $301 billion.

Not only the mixed data but comments from US Treasury Secretary Janet Yellen also defend the Fed doves and weighed on the greenback. That said, the ex-Fed Chair Yellen spoke to Wall Street Journal’s (WSJ) Fed watcher Nick Timiraos and said that she doesn’t see any good reason to think that the last mile is going to be especially difficult.

On a different page, a Houthi official warned, “Vessels sailing through the Red Sea not to turn off radios and to rapidly respond to orders that Houthi give,” which in turn amplified the market’s geopolitical woes and put a floor under the US Dollar during late Tuesday.

China’s annual Central Economic Work Conference was completed on Tuesday and the main takeaways were the policymakers’ push for more stimulus, as well as optimism about witnessing upbeat growth figures. On the same line, the Asian Development Bank (ADB) raised China's 2023 growth forecast to 5.2%, versus the previous projections of 4.9%, while keeping the 2024 economic growth expectations of 4.5% intact. Furthermore, Han Wenxiu, Deputy Head of China Communist Party's (CCP) office for financial and economic affairs, also appeared positive on the world’s second-largest economy’s outlook.

It should be noted that European Central Bank (ECB) policymaker Francois Villeroy de Galhau teased doves while saying on Tuesday that the inflation path to 2.4% from 10.6% is impressive. Further, UK statistics for November bolstered calls for the British recession whereas inflation clues from Japan and Australia hint at the need for higher rates even if the latest comments from policymakers appear elusive.

• Strong buy: USDCAD
• Strong sell: ETHUSD, GBPUSD, Gold
• Buy: USD Index, Nasdaq, USDJPY
• Sell: DAX, FTSE 100, BTCUSD, AUDUSD, EURUSD

FOMC dot-plot is the key…

The recently mixed US inflation clues and the Fed talks push back rate cut expectations for early 2024. With this, the Federal Open Market Committee (FOMC) is mostly expected to keep the benchmark rates unchanged while defending the “higher for longer” rates. The same should keep the US Dollar firmer. However, Fed Chair Jerome Powell’s hesitance in defending the hawkish mode and the dot-plot suggesting nearly 120 pips of rate cuts during 2024 might cap the greenback’s upside.

Ahead of the Fed announcements, the US Producer Price Index (PPI) and the Eurozone Industrial Production will also entertain the market players.

May the trading luck be with you!