Pound Sterling (GBP) and US Dollar (USD) Exchange Rate Expectations Declining on Dovish Oil Forecast

February 9, 2016 - Written by John Cameron

STORY LINK Pound Sterling (GBP) and US Dollar (USD) Exchange Rate Expectations Declining on Dovish Oil Forecast

Global Oil Prices Driving Foreign Exchange Markets

Global oil prices have played a significant part in price action for the world’s major currency pairs since Christmas and this situation is forecast to continue in the short to medium term as the world's oil producing nations keep up the current rate of over-production despite growing rumours that OPEC might meet to discuss cutting production. Our leading analyst explores the reasons why this is the case below …

The primary driver for the relative value of currencies since the industrial revolution has been the currency in question’s relative yield. Put quite simply, investors are invariably more willing to park their funds in currency zones with higher interest rates than those with a lower rate of return. Each currency is backed by a central bank which determines that currency zone’s individual interest rate, and the single most significant factor in helping each respective central bank set policy is the local rate of inflation.

Various components feed in to the pace of price rises in the economy, but by a long chalk the primary determinant of inflation is the cost of energy. This is the reason why global oil prices are of such crucial significance for the currency markets. The price of a barrel of Brent Crude oil slumped from well over $100 a barrel in 2014 to a 13-year low of $27.67 last month but the period since has brought a slight recovery for ‘Black Gold’.

Oil Prices Forecast to Fall Further

Brent Crude reached $36 during the final week of January but now appears to be edging lower once more, with US$35 per barrel proving to be a key resistance point above which either Brent or WTI is struggling to break. A fresh report from International Energy Agency (IEA), published this afternoon, forecasts that there could be further losses to come for oil. The IEA described oil’s near-term renaissance as a ‘false dawn’ and predicted that supply of crude will outstrip demand by a greater amount than it had previously anticipated during the first half of this year.

With demand growth dropping to 1.2m barrels a day this year, it appears highly likely that oil prices will fall to a fresh 13-year low sooner rather than later. Such an outcome is likely to hit the Pound Sterling (currency : GBP) and US Dollar (currency : USD) harder than most due to the fact that Bank of England and Federal Reserve interest rate expectations were well ahead of the curve when oil began to race lower in the middle part of last year. As ever in the currency markets, it’s all relative.

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TAGS: American Dollar Forecasts Pound Sterling Forecasts