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Investors play it safe ahead of FOMC

Technology companies once again led the US stock markets higher. The S&P500 and the Dow Jones manged to eek out new milestones, hitting fresh record highs for a second consecutive session.  Whilst the rise in the price of oil helped buoy the energy sector, investors were mainly playing it safe, ahead of tomorrow’s Federal Reserve monetary policy meeting, the FOMC.

VIX hits monthly low

Monetary policy takes centre stage this week, with the Fed widely expected to raise interest rates by 25 basis points on Wednesday, despite the question of “where is the inflation?” still baffling the Fed. Investors are opting to sit on the side-lines in the lead up to the FOMC and as a result the volatility Index (VIX) is trading at its lowest level in a month.  

Dollar drifts

The dollar was also drifting lower in the absence of fresh impetus on Monday and as the “wait and see” market sentiment ruled. The dollar dropped to a low of 93.70 versus a basket of currencies, however, it is showing some signs of life again in the Asian session and is pushing once more towards 94.00 as investor start to weigh up expectations for the future path of rate hikes in 2018.

Brent above $65 for first time in 2 years

In the commodities market, Brent continues to stage an impressive rebound, closing higher for 3 straight sessions. Early this morning, Brent has soared above $65 per barrel for the first time since 2015, supported by reports that the North Sea’s main pipeline system could be closed for weeks, as it undergoes emergency repairs. Whilst this news is boosting the price of Brent, the market is aware that this is a temporary state for the pipeline, which could mean that the risk premium on Brent could be capped.

UK inflation data moves into view

The FTSE has added 1.8% over the past two sessions, as a softer pound also continues to offer support.

The pound has failed to finish a session higher following the Brexit deal announcement early on Friday morning. This fact probably says quiet a lot about what the market thinks of the deal and the UK’s prospects of securing a trade deal. As Theresa May receives a grilling in Parliament over the deal, the pound has been looking increasingly shaky as investors are progressively more concerned that the “gentlemen’s agreement” deal could unravel quite quickly.

Today’s economic calendar finally offers pound traders something else to sink their teeth into, other than politics. This comes in the form of inflation data, as measured by consumer price index (CPI). Inflation is expected to have remained steady in November, at the current 5-year high of 3% yoy. On a monthly basis, inflation is expected to have ticked up to 0.2%, from 0.1% in October. Should inflation move higher, the pound could rally as investors reassess probability of the BoE hiking rates next year.


Technicals:

Technically, GBPUSD trades close to the previous day low of $1.3338. A disappointing CPI reading could send the pair to the first resistance at $1.3320 (Dec 17 low), before $1.3250 (50- DMA) and $1.32 (psychological level). Conversely an upside surprise could see sterling regain lost ground and push towards $1.3430 (previous session high) then $1.3520 (Dec 8 high).

 

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