Morning Foreign Exchange Report : Arab Unrest Could Cause Oil Price Rally

18 Feb 2011 at 6 AM - Written by John Cameron

STORY LINK Morning Foreign Exchange Report : Arab Unrest Could Cause Oil Price Rally

US policy-makers expressed fears yesterday over civil unrest in the Gulf state of Bahrain. Government forces stepped in to clear anti-government protestors from a square in the Bahraini capital of Manama, leaving several dead and over a hundred injured. The US Secretary of State, Hilary Clinton telephoned her Bahraini opposite-number yesterday to air her ‘deep concerns’ over the developments. The US Navy’s Fifth Fleet is stationed in Bahrain and the small Kingdom is neighbours with key American ally, Saudi Arabia. Yesterday’s scenes in Bahrain follow bloody pro-democracy protests in Libya earlier in the week and Egypt’s popular uprising, raising fears of widespread instability across the Middle East. If these fears materialised, the currency markets would see a significant flight to safety, benefiting the US Dollar and causing the price of a barrel of crude oil to rally.

Yesterday’s US CPI inflation figures for January came out in line with expectations at an annualised 1.6%, suggesting that there is very little likelihood of a raise in interest rates by the Fed in the short-to-medium term.

Meanwhile, in Europe, yesterday afternoon’s Eurozone consumer confidence survey for February gave some grounds for optimism, coming out at -9.9 versus the anticipated level of -11.0. However, caution is advisable as a sub-zero figure shows that more European consumers are negative about future economic prospects than are positive. Sovereign debt fears continue to plague the Euro with Spain failing to sell its full allocation of bonds at yesterday’s auction and speculation that Portugal will need to be bailed out by the ECB in the near-term.

In the UK, there was no tier one data released yesterday, so market participants continued to adjust their positions according to interest rate expectations. The Bank of England Governer Mervyn King alluded to heated debate at the last MPC policy meeting during his Quarterly Inflation Report earlier this week. Next week sees the release of the minutes of February’s MPC meeting; it is expected that these minute will show that at least two members voted for a hike in rates. If any other members of the nine man committee joined known hawks Sentence and Weale, this could lead to significant support for the Pound. Analysts will be looking for a significant improvement in this morning’s UK Retail Sales figure for January, following December’s disappointing figure, which showed a monthly contraction in sales.

The key data release of the day comes in Canada, in the form of January’s CPI figure. Up to this point, the Canadian Central Bank has resisted hiking interest rates, but an inflation figure above last month’s 2.4% level might force their hand, causing further support for the Canadian Dollar.

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