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By Jameel Ahmad, Chief Market Analyst at FXTM
To sum up, there were no surprises from the FOMC statement yesterday evening. Throughout previous statements, “more of the same” has been the underlying tone and yesterday evening’s statement basically repeated the same message. There is no doubting the US labour market is making consistent progress while inflation expectations have always been something the Fed have seen as a priority, and it will continue to monitor potential inflation risks closely over the coming months. Overall, I do think reality is sinking in now and it’s becoming clearer that optimism the Fed would raise rates as early as March/April was always wishful thinking.
Many are now expecting the first rate increase to occur in June, while I am expecting it around September time. The Federal Reserve was never in a hurry to conclude QE, nor will it be in a hurry to begin raising interest rates.
The comments from the FOMC indicating that it remains unconcerned regarding the current price of oil inspired investors to resume selling, with Crude falling to a new five-year low at $44.07. Considering the economic conditions the commodity faces remain aggressively stacked against it, there is always going to be a continual risk of further selling.
There also remains a very clear supply and demand equation in the oil markets, which continually remains firmly weighted in the bears’ favour. Issues such as an oversupply of a reported 2 million barrels a day will not go away anytime soon, and indications of other nations still increasing production basically means there is a risk the oversupply might increase further. Not only this, but anxiety over the pace of the global economic recovery is repeatedly catching headline attention.
This is making investors question whether demand for the commodity might actually decline anyway, meaning they become tempted to sell.
All in all, it appears inevitable that the price of crude will repeatedly be at risk to recording a new low. For the price to bounce up for a significant period of time, the economic conditions the commodity face need to change, and it is unlikely to do so for quite some time. How low might the price of Crude go? The next major psychological level it faces is around $42 and if it extends below here, you can’t rule out potential moves below $40.
Although the EURUSD was proving to be resilient and refusing to weaken in spite of the complete punishment stocks in Greece were handed yesterday, it eventually caught up with the pair. This alongside the USD strengthening following the Federal Reserve indicating that it will raise US interest rates during 2015 led to the EURUSD slipping by nearly 100 pips to 1.1275 on Wednesday. The complete divergence in both economic sentiment and monetary policy between the ECB and Federal Reserve is clear to see, and has widened further following the ECB finally pulling the trigger on QE. Once the Federal Reserve approaches the timing of its first rate rise you would expect this divergence to stretch even further, meaning the longer-term bearish outlook for this pair is still strong.
In the meantime, there are reports Greece will refuse the possibility of adding fresh economic sanctions on Russia later today. This would seemingly strain political relationships with its European partners and potentially weigh on market sentiment.
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