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Investors expecting immediate stimulus measures from the United States, the world’s top oil consumer, were disappointed after the Fed held off from providing more help to the economy, although it kept the door open for further bond buying, also known as quantitative easing (QE).
“QE3 is much more significant than a rate cut, because it requires the expansion of the Fed’s balance sheet. As such, the barrier to implementing QE3 is higher, and the economic data will need to be dire, before the FOMC is likely to act,” Jason Schenker, president of Prestige Economics, said in a note.
The European Central Bank (ECB), which meets later in the day, is now carrying the burden of the market’s hopes, with investors anxiously waiting to see if bank President Mario Draghi will back up his vow to do whatever it takes to protect the euro with serious action.
Brent crude edged up 4 cents to $106 per barrel by 0426 GMT, while U.S crude inched down 5 cents to $88.86 per barrel.
Oil prices were also supported by a U.S. Energy Information Administration report that showed a drop of 6.5 million barrels in domestic crude oil inventories last week, the largest weekly drawdown since December and far more than the 700,000-barrel drawdown forecast in a Reuters poll.
Investors are now focusing on the ECB policy meeting, with expectations for bold actions after Draghi’s pledge last week.
Spanish bond yields continue to trade at unsustainably high levels, which has Europe on edge that Madrid will require a bailout. Spain, the euro zone’s fourth largest economy, lies at the centre of the bloc’s debt crisis, as it struggles with a second recession in three years, record unemployment and soaring bills from its regions and banks.
“We now expect at least a 25 basis point rate cut at the meeting,” said Schenker from Prestige Economics. “Anything less could send the dollar sharply higher, commodity prices lower, and could also push equities lower as well.”
But others were not as optimistic.
“I don’t think the market is going to get the kind of proclamations from the ECB that it wants, the fundamental issues in Europe are going to take time to work through,” Ritterbusch said.
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