Middle East unrest sends oil prices to 2.5 year high; sterling under pressure
22/Feb/2011 • Currency Updates•
The currency markets were rangebound yesterday due to a lack of significant economic data releases and reduced liquidity as the US market was closed due to the George Washington’s birthday holiday. Sterling was put under pressure this morning though due to profit taking from the previous week’s gains as traders became concerned over the rising tensions in the Middle East and surging oil prices. The fact that we are likely to see higher oil prices as riots and protests continue in Libya and threaten to spill over into the OPEC countries is not good for the UK economy as we are heavily reliant on ME oil and are already facing a battle with inflation partly down to soaring commodity prices. The only data released today is public sector net borrowing (09:30) but this is unlikely to have a significant impact on the pound.
The US dollar edged up against a basket of major currencies early in Asia on Tuesday after a subdued day of trading due to a US holiday on Monday. Sparse trading conditions on Monday limited any major moves but the greenback has been the main beneficiary of political turmoil in the Middle East and severe earthquakes in New Zealand overnight. Due to nervy investors looking to cut risk the dollar has had an early morning fillip but it remains to be seen if the recent trend of decoupling between the dollar and flight to safety bids limits any gains. The key piece of US data out today, amidst a frugal economic calendar, is the US consumer confidence survey (15:00) with a high reading serving to boost the dollar as consumer demand underpins economic expansion in the US.
The euro lacked the required vigour to make the most of any moves yesterday as political uncertainty in German regional elections posed problems for investors looking to Merkel to lead the European recovery. Germany’s main ruling party was at the hands of a heavy defeat at regional elections in Hamburg, suggesting the Angela Merkel’s party faces a tough battle to retain the electoral mandate in the country. For investors a lack of clarity over economic policy in Germany, the behemoth of the EU, can only be seen as negative for wider recovery in the single currency block. Despite this the euro received support as ECB policymakers continued to warn, at a meeting on Monday, that inflation was to high supporting analysts who believe the ECB are likely to hike rates prior to their counterparts in the US Fed. Oil prices spiked to a 2 and a half year high yesterday after spiralling violence in Libya and fears of contagion in the OPEC states. This news could be a negative for the euro as traders look to profit take and ditch riskier assets. Elsewhere, Axel Weber, President of the Bundesbank, spoke out in support of the size of current European bailout fund and EFSF suggesting no further ‘beefing up’ was required.