Morning Foreign Currency Market Outlook : EUR/USD Drags the GBP/USD Rate Higher as Market Reacts to Libyan Air Strikes

March 21, 2011 - Written by John Cameron

STORY LINK Morning Foreign Currency Market Outlook : EUR/USD Drags the GBP/USD Rate Higher as Market Reacts to Libyan Air Strikes

The Pound Dollar exchange rate (GBP/USD) is 1.6238 . The Pound Euro exchange rate (GBP/EUR) is 1.1473 .

Global geo-political events continue to dominate the world’s currency markets. Allied forces launched a series of air strikes on Libya over the weekend in an attempt to enforce the UN-mandated ’no fly zone’ over the troubled Arab state. One of the strikes destroyed part of Libyan leader Colonel Gaddafi’s compound in Libya, thought to be a command centre.

The Libyan strikes were led by fighters from the US, UK and France. Russian officials commented yesterday that the allied attacks went beyond the mandate of the original UN ’no fly zone’ directive, causing concerns that Libyan unrest could re-ignite latent tensions in the global community. Commentators have also noted that although the UN directive ostensibly enjoyed the support of The Arab League, there are many Arab states who strongly oppose the allied forces’ Libyan offensive.

The effect of the strikes has been to push oil prices higher. The price of a barrel of Brent Crude is now above $116 as fears over supplies and a potential spreading of the Arab uprising increase.

Meanwhile, Japan’s nuclear crisis appears to be abating, with electricity supplies being restored to three of the reactors at the stricken Fukushima nuclear plant in the last 48 hours. The UN estimates that the final cost of clearing up after the March 11th
earthquake will be $235bn, making it vital for the recovery that Japanese authorities are successful in their aim of weakening the Yen in order to boost the domestic manufacturing base.

In the first four trading days of last week, the Japanese government released trillions of Yen onto the markets in an attempt to weaken the Yen, without avail. However, the concerted action by the G7 group of nations which came during Friday’s session, appears to have had the desired effect with GBP/JPY moving away from its Wednesday low in the 122s to trade above the 132 level on Friday.

Turning to the overall picture, with massive uncertainty in world markets, ordinarily the US Dollar would be expected to be the main beneficiary, due to it’s traditional status as the world’s leading reserve currency. However, GBP/USD has improved from its Thursday low of 1.5983 to currently trade above 1.6200. Analysts suggest that this may be due to the fact that the world’s most liquid currency pair, EUR/USD, is trading close to a 14 month high as sentiment towards the Euro improves on expectations of an ECB rate rise next month and receding fears of an impending Eurozone sovereign debt crisis. Higher rates on EUR/USD have dragged the Greenback lower against other major currencies.

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