Central Banks are getting attention for the first time in nearly two years when taking into consideration the possibility of interest rate hikes. The major Central Banks including the ECB, BoE, and Fed have not had the slightest threat of borrowing hikes in nearly two years, but this circumstance may be about to change if the price of Oil continues to stay high. However, this does not mean that interest rate hikes would be the correct policy. Economists are certain to argue this point until they are blue in the face, but if the ECB were to increase their interest rate they would likely be causing a major blow to many of the stagnant countries that make up the European Union, particularly Greece, Ireland, and Spain – among others who are still very much struggling with lackluster economies and tight austerity measures due to a haze of financial problems. In other words an interest rate hike could be a serious fly in the soup for many nations. While inflation is certainly a fear and the rising price of Crude Oil cannot be pushed to the side, serious questions will have to be weighed regarding the pros and cons of a hawkish interest rate policy. The BoE will be meeting this week and this may provide some clues about policy. Both the BoE and ECB have written mandates, that they must monitor the rate of inflation, but strict observance to this ‘rule’ may cause a fundamental crack in any attempts to achieve growth. Having said that a spike in the energy prices is dangerous too and countries may find themselves between a rock and a hard place.
The USD gained ever so slightly against the EUR and GBP on Monday as the Greenback came off of its lows. The JPY traded in a consolidated range versus the USD, along with the AUD. The developments in the Middle East and North Africa continue to shake the market. While Libya lurches back and forth within disarray, there are heightened concerns that Saudi Arabia may be facing increasing unrest. Needless to say, if Saudi Arabia faces protests and demonstrations were to get out of control, the price of Crude Oil could become increasingly volatile. Gold remains around record territory, but it did come off of its record highs yesterday.
OPEC quotas are being discussed regarding the production of Crude Oil and the major nations that are exporters of Oil will be looked to for stability to help insure supply. There is a genuine lack of economic data today and developing news from the political crisis in the Middle East and North Africa will continue to be the focus, along with any whispers and rumors swirling around Central Bank policies from the major economies. Geo-political events are shaking the investment world and currencies have been nothing short of volatile because of the unfolding events.
Commodity prices have been bouncing along highs and it has been inflation in food prices that have kicked off plenty of the political unrest that is being seen. If the price of Crude Oil continues to stay high it poses a definite risk to the major economies and their ability to fight recession. Nations face a domino effect regarding high energy prices.
Storm clouds are prominent and traders must continue to carefully consider the difference between short term and long term. Momentum trading is certainly there for the taking, but traders must have enough stamina to withstand reversals and a whirlwind of shifting sentiments.
Tomorrow German Industrial Production data and the Crude Oil Inventories statistics will come from the States. But the story of the day is clearly based on risk sentiment and the price of commodities, which are driving many political storms and having a direct effect on currencies.
Written by bforex.com
