Oil has gapped higher at the start of the week on the news that Saudi has signalled more cuts in production to come, whilst non-OPEC producers have pledged to cut production in the coming year. This comes on the back of the OPEC deal agreed at the end of last month and has propelled the front Brent contract above the USD 55 pb level, to just below the USD 57 pb level. This means that oil prices have risen nearly 25% over the past month on the basis of lower anticipated production, but also on expectations of stronger growth in the US on the back of Trump’s recent election victory. Not surprisingly, we’ve seen oil exporting countries see their currencies gain the most overnight, the Norwegian krone, Canadian dollar and Mexican peso gaining the most. Oil importing Japan has seen its currency close ground against the dollar, pushing USDJPY further above the 115.00 level.
Once the dust settles from these moves, the main focus for the week will be with the FOMC meeting on Wednesday. Yes, an increase in rates is fully priced in, but what will matter for markets will be the extent to which the Fed endorses expectations for rate increases over the coming year. The market anticipates a further two rates increases over the course of 2017, so it will be the Fed’s projections here that will determine whether the dollar can push ahead and possibly make new highs on the dollar index. The data calendar is relatively quiet today, which should keep volatility on the light side as traders wait for Wednesday’s Fed meeting.