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Fed in focus as dollar's popularity continues

Yesterday’s bounce is but a distant memory as screens turn red across financial markets. Central bank commentary is at the fore, but the dollar continues to be the trade of choice at present.

Federal Reserve
Source: Bloomberg

Osborne plays the long game

Today saw George Osborne present the final budget of the coalition's current term in office. However, those holding out for some sort of rabbit to be pulled out of the hat were unfortunately disappointed. Instead, Mr Osborne stuck with the status quo by taking aim at measures such as cutting corporation tax, increasing the tax-free allowance and helping first-time buyers get onto the property ladder.

Perhaps the most interesting decision was that instead of using the excess cash derived from lower oil prices and lower interest charges to implement a real blockbuster policy, Osborne played the role of a steady captain and opted to pay off more of the national debt. This shows Osborne as  someone who is focused on future prosperity and economic health as opposed to short-term political gains.

Oil majors were buoyant ahead of today's budget owing to the expectation that we were going to see some sort of measures aimed at both the energy sector and more specifically the North Sea oil industry. While any wide-ranging industry policies were in short supply, Mr Osborne did introduce £1.3 billion in support for those operating in relation to the North Sea oil fields which should allow a greater chance for investment going forward. There is no doubt that the decision from those within Scotland to remain within the wider UK has been shown to be a good one given the difficulty for North Sea oil to remain competitive with such low oil prices.

Despite gains for the likes of Shell and BP in the lead up to this announcement, the fact is that their trading environment remains difficult, as highlighted by WTI hitting a new six-year low just earlier this week.

Elsewhere, the announcement from Mr Osborne that the government will sell at least £9 billion worth of shares in Lloyds over the coming year saw an initial 0.6% selloff in the banking group. However, with the company having announced its first post-bailout dividend last month, many expected it might be time for the government to cash in its chips.

Dow around 500 points off month-high

The global markets will be firmly focused upon the US from now on, with expectations distinctly mixed with regards to whether Janet Yellen will remove the reference to 'patience' in relation to interest rate hikes. The outperformance of the jobs market in the US has certainly pushed Ms Yellen towards implementing a tighter policy stance, indicating that besides a potential shift in language she will be deciding on possible rate hikes on a meeting-by-meeting basis. However, I am always hesitant to expect a change from the norm and I can see Ms Yellen proving patient with 'patience' in this occasion.

With the likes of the Dow Jones some 500 points off its high earlier this month, people are certainly attempting to factor in the risk of a change in stance from the Federal Reserve. However, with the price currently resting upon the 100-day SMA, there is also the chance that today could serve as a springboard for another leg higher in US indices.

Elsewhere, General Motors has decided to shut its Russian plant and wind down the Opel brand. With low expectations from the Russian market's growth prospects this seems a sensible move and with prices still just 7.7% off the multi-year highs of late 2013, it seems investors believe the business will do well enough off the likes of its premium Cadillac and Chevrolet brands to make up for the loss of Opel.

Brent eyes more selling

With WTI having hit a six-year low earlier this week, the expectation is that Brent will do something very similar. The oil glut, driven primarily by the US shale revolution, continues to feed bears in the market and many expect prices to be lower for longer. A break below $52.72 in Brent should be enough to instigate yet another round of selling in the market, putting more pressure on oil-producing nations and boosting the likes of the UK who is a net importer of the black stuff.

Gold and silver remain within a period of consolidation, following strong February selling. That selloff appears to have completed the majority of its move, yet I could see us come off a little more to reach the 2014 low of $1130 prior to gaining any sort of substantial bullish sentiment.

Dollar breaking higher

The dollar index is breaking higher today, despite some indecision across on the likes of EUR/USD. Tonight's announcement from Ms Yellen no doubt will be leading to traders locking in US-related profits and reducing risk for any dollar pairs due to the potential of a fundamental driven spike.

However, the fact that the dollar is largely continuing to rally means that there is certainly inherent strength within the greenback and thus should we see Ms Yellen withdraw the 'patient' stance. I would expect a larger jump in the dollar than the fall associated with remaining as it was.

 

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