The U.S. Dollar is trading lower overnight following a strong three-day rally.  Weakness was anticipated to begin because of position squaring as the Fed begins its two day Federal Open Market Committee Meeting.

On Wednesday the Fed is expected to announce that interest rates will remain the same at near zero.  With the economy improving, the Fed is also expected to allow its quantitative easing program to expire in September.  Although its original $300 billion asset buyback program will be ending, the Fed may keep open the possibility of providing additional financial stimulus to the economy.  

One job the Fed has to do is keep investors informed as to what is really happening in the economy.  Following last Friday’s better than expected U.S. Unemployment Report, speculation soared that the Fed would have to consider hiking interest rates sooner rather than later.  The job of the Fed at this time is to maintain the steady optimism about an economic recovery without curtailing the actual U.S. recovery.

In other words, while the Fed welcomes enthusiasm over the possibility of the recession ending in the U.S., it wants to make sure that investors remain grounded in reality rather than excessive speculation.  

With the Dollar weakening, look for December Gold and September Silver to rally.  Don’t expect too much of an up move.  This is just traders buying back short position following yesterday’s huge sell-off.  

September Crude Oil is expected to firm today because of the stronger Euro.  The energy markets could be the most interesting markets to watch over the short-term.  One group of investors feels crude oil will break if the Dollar gets strong.  Another group feels that a U.S. economic recovery should lead to new demand for energy products.

We could be looking at a choppy two-side range in the equity markets.  Traders are optimistic about the economy, but many investors feel that stock valuations are ahead of themselves.  These investors have either stopped buying or are taking profits after the recent rise.

Treasury traders have auctions to deal with this week.  Yields have risen enough to make them attractive alternatives to the stock market.  This should make today’s auction move smoothly.  Expectations are for this auction to find demand.  The surprise will be low demand.  This would force yields higher and break the September Treasury Bonds and Notes late in the trading session.


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