Strong US Dollar and weak oil set the opening tone for this week

The weak lead from US markets together with Friday’s sharp drop in oil prices will see a soft tone set for the opening of this week’s trading on the local stock market.

Another strong rally in $US reinforces the fact that the Fed’s FOMC meeting will be the key market event this week.  While any decision to actually begin increasing rates will depend on the flow of economic data over coming months, any change in the wording of the Fed’s guidance this week will still be a key milestone. Removal of the time based, element of “patience” from the FOMC guidance will indicate the Fed sees the US recovery  as being  far enough advanced and the threat of inflation far enough removed to withstand some increase in rates should future data justify it.

Friday’s drop in oil prices is likely to see energy stocks under pressure today but also has wider implications for world economies. While central banks generally attempt to look through lower oil prices when assessing the medium term inflation outlook, weaker oil prices still have the capacity to feed through to second round inflation affects and are a reminder that significant areas of excess supply remain in world economies.

From a technical point of view, the ASX 200 index remains in a corrective down trend. If the index falls below last week’s lows, technical traders will be watching to see if the index is able to hold support between about 5680 and 5720. This support consists of last August’s high and also the 38.2% Fibonacci retracement of the last major rally. A break below this support would indicate that the current correction is likely to be a significant one with potentially further to play out in terms of both price and time.