Oil jumps after inventory draw; Stocks await key Fed decision

Summary:

• Oil rallies after drop in US stockpiles

• CAD jumps on CPI beat

• Pound seeks to recover as inflation meets forecasts

• Quiet session for stocks ahead of key event

• Fed rate decision due at 7PM (BST); Powell presser 30 mins after

A bigger than expected drop in the weekly US inventory figure has caused a swift move higher in the oil benchmarks with both Brent and WTI rallying since the release. After a bumper day of gains yesterday, the markets had pulled back a little ahead of the data, but an all-round positive release has sent price back up near Tuesday’s highs. There are some signs that the Oil market is attempting to form a bottom but longs would like to see a break above the 54.60 in Oil.WTI and also the 21 EMA before a sustained recovery can occur.

Inflationary pressures are on the rise in Canada and the BOC could find themselves in a tricky position with rising prices at a time when many of their peers are cutting rates. The latest CPI figures showed a rise of 2.4% Y/Y in May, the highest in 7 months, and also well above the +2.1% expected. 2 out of the 3 core measures also topped forecasts with the median and trimmed both moving above the 2% handle as it seems that price pressures in Canada are on the rise.

Ahead of tomorrow’s Bank of England rate decision there has been no surprises in the release of the latest UK inflation figures, with rate-setters still all but certain to make no significant changes to monetary policy. Headline inflation of 2.0% Y/Y for May met both the consensus forecast and the Bank of England’s target but due to the ongoing Brexit uncertainty it is unlikely that Governor Carney follows the ECB or the expected move from the Fed in delivering a dovish turn. The core reading of 1.7% Y/Y is often seen as a fairer gauge of price pressures and this remains comfortably below the bank’s threshold. GBPUSD bounced from the 1.25 handle and with both the UK and US central banks set to announce the outcome of their latest policy decisions in just a little over 24 hours it could be a volatile time for this market.

After a solid day of gains yesterday, US stocks are little changed this afternoon as traders eagerly await this evening’s Fed decision. A dovish message from Draghi helped boost equities on both sides of the Atlantic during Tuesday’s session and the markets appear in a pretty upbeat mood going into the US central bank decision, hopeful of further dovish support. There is a concern that Chair Jerome Powell and his fellow FOMC members will be unable to meet these lofty expectations and if they do deliver a more cautious message on rate cuts and the possible end of Quantitative Tightening (QT) then investors could be in for a nasty shock. Having said that, the rate-setting committee will be well aware of the market expectations and given the additional pressure from President Trump, who was in fine form on Twitter yesterday doing his best to force the Fed to turn dovish, it would be surprising if the tone of the update isn’t at least a bit more dovish.   

Read an in-depth preview of the event here