Oil Drops As Hawkish Fed Comments Boost USD

After staging a big rally for much of last week, crude oil has reversed course and started to retreat today, with WTI falling 2.8% and Brent dropping 3.2%. Stock markets are also down but falling at a smaller pace. US index futures and the DAX are down about 0.2%, with the FTSE down 0.4%.

USD is up 0.4% against gold and 0.25%-0.75% against other majors, with oil dragging on CAD.

Today's action follows more hawkish Fed comments over the weekend, this time from Stanley Fischer, who indicated the Fed is close to hitting its targets.. On inflation he noted 1.6% Core PCE inflation is within hailing distance of the Fed's 2.0% target.

On unemployment, ‎he indicated that the unemployment rate is approaching natural levels (ie full employment) and while slower than last year, job growth is more than enough to indicate a strong job market.

His comments continue a trend from last week of Fed members talking down the level of job growth needed to satisfy the Fed to take action. While he didn't call for a hike soon as Dudley did last week, the street has taken these comments as hawkish leanings.

With two of the Fed's ‎big three members in the hawkish camp, traders may look to Fed Chair Yellen's comments at Jackson Hole on Friday to give more of a sense of whether the Fed is leaning toward a September or December increase.

While US speculation has dominated the agenda so far, later in the day focus may turn to Europe, with German Chancellor Merkel, French President Hollande and Italian PM Renzi holding a summit meeting on Brexit. Tonight, flash PMI reports give the first indication into how economies are doing in the second month following the UK Brexi‎t vote and whether or not any longer-term impacts have appeared.

In Canada today, energy stocks may be impacted by the slide in the oil price. We also may see positioning in the big banks ahead of earnings week which starts tomorrow. Results for this quarter may be mixed between distortions from the Fort McMurray wildfires, a sluggish Canadian economy and a strong US economy.