Will anyone rush to the market’s rescue? Keep your eye on the Fed

The price of crude oil continues to fall.

And equities are being dragged along with it.

Can anyone save us from the horrors of a market that goes down as well as up? And the sheer awfulness of lower petrol prices?

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We're about to find out

The dollar could be heading for a sucker punch

On Wednesday, the US Federal Reserve will announce its plans for interest rates in the US. On Friday, we have the Bank of Japan giving its take on monetary policy.

No wonder markets are playing up. They want the world's central banks to dish out some sweeties, and they won't stop stamping their feet until they get them. You saw what happened when the European Central Bank hinted at more easing markets rallied. They want some more of that this week.

So what's likely to happen?

The Fed has been saying that it plans to raise rates four times this year. That's increasingly hard to believe and the market certainly doesn't think it's going to happen. At the moment, investors are pricing in just over one rise this year, according to Reuters.

Now, markets have been pretty poor at predicting what the Fed will do in recent years. But given that the Fed bottled out of raising rates last September, following a very similar China/oil-driven crash, it's hard to see it continuing with it now.

And if I'm honest, I'd also expect some dovish noises not necessarily a hint at rate cuts, but certainly a nod to the market that they won't carry on raising unless they feel that it's "justified" by the data. A soothing pat on the head at least.

What does that mean? Well, the biggest immediate impact the Fed can have is on the US dollar. It's all about currencies and currency wars these days, and the strong US dollar is the thing that's causing a lot of the pain in emerging markets and commodities.

If the Fed wants to put a stop to that particular market "doom-loop", it can do it by taking some of the steam out of the dollar.

Jeffrey Gundlach, the bond guru du jour now that Bill Gross has given up that particular crown, makes some interesting points in the latest issue of Barron's:"The dollar is overvalued. It rose 25% in a year. People think a stronger dollar accompanies the start of a Fed tightening cycle, but history suggests otherwise. It is possible, even likely, that the Fed wants to dial back some of its rate-hike rhetoric. If that is the case, the dollar could weaken about 10% against a basket of currencies."

As for Japan I'm not as convinced that the Bank of Japan will boost stimulus this week. It'll probably wait and see what the Fed does. But the Japanese don't want the yen to get a lot stronger than it is now not after all the effort Shinzo Abe put in to weaken it. So I wouldn't be surprised if a bit more Bank of Japan action is in the pipeline. (Which is another good reason to hang on to Japanese stocks, by the way.)

For more on the oil price crash, China, and the state of global trade, check out the latest MoneyWeek podcast, where I chat to our resources specialist Alex Williams. Alex has an interesting take on the Baltic Dry Index and he also has some strong ideas on alternative indicators we should be paying attention to. Check it out here.