Are spikes in energy prices to blame for flurry of monetary stimulus?

Are spikes in energy prices to blame for flurry of monetary stimulus?

Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 12th of April.

The European markets somewhat stabilised yesterday though earlier losses couldn’t be entirely wiped off. The rise in Spanish and Italian bond yields were reversed after an ECB official said the central bank could intervene in the peripheral bond markets through its Securities Market Program. This calmed nerves though Spanish and Italian papers, at 5.85 percent and 5.5 percent, remains at significantly elevated levels. The focus will remain on Italy today as Rome hits the debt market.

Many investors are hopeful that central banks would come to the markets’ rescue as they did on previous occasion. However, bankers may be little reluctant to flood markets with liquidity as inflation and oil prices remain stubbornly high. If falling stock markets are bad for the economy, so are rising inflation and energy prices. Many economists have blamed the flurry of monetary stimulus for the spike in energy prices. Andrew Sentence of the BoE monetary policy committee warned in March that unless there’s a rethink on monetary policy, Britain may revisit the inflationary conditions of the 1970s.

Global investors must choose between the two bitter realities; a return to eurozone crisis with middling global growth, or a high inflationary situation that hinders global recovery substantially. The ECB can ill-afford to intervene after having supplied a trillion euros in the banking system recently.

A drop in commodity and energy prices (and equities) will be good for world economy. A $20-$30 drop in oil prices will stimulate the sputtering growth. That might be bad news for the financial markets in the short-term, but would do good to growth, jobs and ordinary consumers.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2122
GBP/US$ – 1.5924
GBP/CHF – 1.4577
GBP/CAN$ – 1.5936
GBP/AUS$ – 1.5322
GBP/ZAR – 12.651
GBP/JPY – 129.10
GBP/HKD – 12.3684
GBP/NZD – 1.9381
GBP/SEK – 10.795

EUR: The single currency got support after an ECB official said the central bank may intervene in the peripheral European bond markets to halt rising borrowing costs. The EUR/USD pair rallied to 1.3150 though the pair had slipped in the US session following ratings agency Fitch’s warning on the Spanish banking system’s funding woes. The EUR/USD rally did push the GBP/EUR pair down, but the latter bounced back in late trading to close the day at 1.2143. The pound retained its safe-haven status as the euro looked vulnerable over the latest Spanish and Italian developments. The market is light on economic data today except for the eurozone industrial production number today. The GBP/EUR pair opens at 1.2140 today morning.

USD: The greenback traded lower against its global peers yesterday over better risk sentiments. As European sovereign bond yields dropped and US earnings season started off strongly, investors were seeking out risky assets. The sentiments were further bolstered by the Fed’s better-tan-expected Beige Book report. The GBP/USD pair started the day strongly to hit an early high of 1.5939, but failed to break above the level stayed range-bound for the remainder of the day, trading around the 1.5900 level. There’s not much news coming from the UK though a slew of data is expected from the other side of the pond. The GBP/USD pair opens at 1.5926 this morning.

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Have a great day!

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