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.
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Frequently Asked Questions about this Article…
A strong US dollar can influence the stock market by affecting the competitiveness of US exports, impacting multinational companies' earnings, and influencing investor sentiment. It can also affect commodity prices, such as oil, which are typically priced in dollars.
A drop in oil prices often puts pressure on energy stocks as it can lead to reduced revenues and profits for companies in the oil and gas sector. This can result in lower stock prices for these companies.
The Federal Reserve's FOMC meeting is crucial for investors because it provides insights into the Fed's monetary policy, including interest rate decisions. Changes in interest rates can significantly impact economic growth, inflation, and investment returns.
The removal of 'patience' from the Fed's guidance suggests that the Federal Reserve believes the US economy is strong enough to handle potential interest rate increases, indicating confidence in economic recovery and a reduced threat of inflation.
Lower oil prices can have mixed effects on global economies. While they can reduce costs for consumers and businesses, boosting spending and growth, they can also signal excess supply and potential economic slowdowns in oil-producing regions.
The ASX 200 index's corrective downtrend indicates a period of market adjustment following a previous rally. Investors watch for support levels to gauge the potential for further declines or a market rebound.
Fibonacci retracement levels are technical analysis tools used to identify potential support and resistance levels in a market trend. They are important because traders use them to predict price movements and make informed investment decisions.
Investors can contact CMC Markets for further commentary by calling 02 8221 2137 for insights and analysis on market trends and investment strategies.
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