Forex News
- Yemen's Houthis declare a naval blockade against Saudi Arabia in an official statement.
- The Iran-aligned group describes the measure as a maritime embargo against Saudi Arabia.
- Markets are monitoring the risk of further regional escalation and potential disruptions to energy trade.
Yemen's Houthis announced on Monday a naval blockade against Saudi Arabia, according to a statement reported by Reuters. The group's military spokesperson said the measure takes effect immediately, describing it as a maritime embargo against Saudi Arabia, although no further details were provided on how it would be enforced.
West Texas Intermediate (WTI) US Oil reacted higher to the headlines, rebounding from daily lows below $80 to trade around $81.35 at the time of writing. The commodity has recovered part of Monday's losses but remains down 0.48% on the day.
WTI Oil FAQs
WTI Oil is a type of Crude Oil sold on international markets. The WTI stands for West Texas Intermediate, one of three major types including Brent and Dubai Crude. WTI is also referred to as “light” and “sweet” because of its relatively low gravity and sulfur content respectively. It is considered a high quality Oil that is easily refined. It is sourced in the United States and distributed via the Cushing hub, which is considered “The Pipeline Crossroads of the World”. It is a benchmark for the Oil market and WTI price is frequently quoted in the media.
Like all assets, supply and demand are the key drivers of WTI Oil price. As such, global growth can be a driver of increased demand and vice versa for weak global growth. Political instability, wars, and sanctions can disrupt supply and impact prices. The decisions of OPEC, a group of major Oil-producing countries, is another key driver of price. The value of the US Dollar influences the price of WTI Crude Oil, since Oil is predominantly traded in US Dollars, thus a weaker US Dollar can make Oil more affordable and vice versa.
The weekly Oil inventory reports published by the American Petroleum Institute (API) and the Energy Information Agency (EIA) impact the price of WTI Oil. Changes in inventories reflect fluctuating supply and demand. If the data shows a drop in inventories it can indicate increased demand, pushing up Oil price. Higher inventories can reflect increased supply, pushing down prices. API’s report is published every Tuesday and EIA’s the day after. Their results are usually similar, falling within 1% of each other 75% of the time. The EIA data is considered more reliable, since it is a government agency.
OPEC (Organization of the Petroleum Exporting Countries) is a group of 12 Oil-producing nations who collectively decide production quotas for member countries at twice-yearly meetings. Their decisions often impact WTI Oil prices. When OPEC decides to lower quotas, it can tighten supply, pushing up Oil prices. When OPEC increases production, it has the opposite effect. OPEC+ refers to an expanded group that includes ten extra non-OPEC members, the most notable of which is Russia.
Rabobank’s Jane Foley notes that softer Norwegian inflation has tempered expectations for further Norges Bank tightening, even after May’s 25 bps hike to 4.25%. With the Norwegian Krone (NOK) still one of the strongest G10 currencies this year, Foley expects EUR/NOK to trade close to 11.00 over 1–3 months before moving lower on a 6‑month horizon.
NOK strength meets softer inflation
"Despite having retraced some of its year-to-date gains last month, the NOK has rallied around 6.85% vs. the EUR since the start of the year."
"Despite the hawkish messaging last month, following the softer June CPI inflation print, the market is only priced for 17 bps of rate hikes on a 6-month view."
"Understandably, the softer than expected release has led to a re-evaluation of market expectations regarding the outlook for policy tightening from the Norges Bank, with forecasts for the next move being dampened."
"On the back of doubts regarding further Norges Bank rate hikes, we expect EUR/NOK to stay close to the 11.00 level on a 1-to-3-month view."
"We see scope for choppy range trading around the 11.00 area on a 1-to-3-month view before EUR/NOK finds fresh momentum to push lower on a 6-month view."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
Commerzbank’s rates team expects higher oil prices and weak growth signals to shape Thursday’s European Central Bank (ECB) meeting. A July rate hike is effectively ruled out, while markets have fully priced in another 25bp move in September. Lagarde is expected to emphasise inflation risks without pre-committing, as Friday’s flash euro area PMIs may show that the recovery remains fragile.
September hike seen but not pre-committed
"The ECB will be this week's highlight on Thursday, followed by the Fed decision next week."
"Rate hikes can be confidently ruled out this month."
"However, bouncing oil prices leave another ECB rate hike in the offing for September, which is also fully priced in (+24bp)."
"While Lagarde is likely to strike a firm tone with regard to inflation risks she is unlikely to pre-commit to the September hike, as the situation remains in flux amid rising headwinds to growth."
"This week's data is likely to signal that economic recovery remains distant."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
TD Securities’ Julie Ioffe expects United Kingdom (UK) headline Consumer Price Index (CPI) to slow to 2.7% year-on-year in June, in line with consensus but below Bank of England (BoE) projections, as lower fuel prices offset sticky Services. Core CPI is seen at 2.6% and Services at 3.6%. TD highlights the inflationary pass-through from Ofgem’s July price cap increase and potential second-round wage effects as key risks for UK inflation and Bank of England policy.
Fuel-driven reprieve but services sticky
"We expect headline inflation at 2.7% y/y in June (mkt: 2.7%, BoE: 3.1%, prior: 2.8%), easing slightly from May levels as fuel prices deliver some reprieve from the levels seen in the spring. We see services inflation remaining sticky, only coming down slightly to 3.6% y/y (mkt: 3.5%; BoE: 3.6%; prior: 3.7%), due to inflationary pressures from airfares. With core goods not delivering much of a story this month, this would keep the core inflation measure at 2.6% y/y (mkt: 2.6%)."
"There will be no Ofgem adjustments to electricity and gas prices in June, making fuel the only pertinent story. There, fuel prices are likely to drop more on a m/m basis after a slight easing in April, though we expect the y/y measure to remain elevated at 21.3% y/y. Including annual electricity and gas contributions, energy inflation as a whole is likely to increase to 5.9% y/y, with further pass-through expected over the coming months."
"A key factor is the index date on which ONS collects prices. For June, the two possible dates that meet the ONS criteria are June 9th and 16th, and our forecasts use data collected on the latter. A change in collection date creates a fair downside risk on airfare prices, which would bring services to 3.5% y/y and core down with it to 2.5% y/y, to match current market consensus."
"Beyond that, concerns shift to whether wages respond to higher inflation. There, we see less of an obvious impact given the loosening of the labour market and reduced bargaining power of the worker. Should these remain at bay, the BoE is more likely to remain on a prolonged hold at its already-restrictive level of Bank Rate, rather than elect for an imminent hike."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
- EUR/USD edges down to near 1.1432 as the US Dollar bounces back.
- The US Dollar rebounds despite Oil prices falling back.
- Investors expect the ECB to leave interest rates unchanged in the policy announcement on Thursday.
The Euro (EUR) trades marginally lower near 1.1432 against the US Dollar (USD) during the European trading session on Monday. The major currency pair edges down as the US Dollar recovers its early losses.
At press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades marginally higher to near 100.77.
The Greenback bounces back even as Oil prices have retreated amid hopes of de-escalation in ongoing military aggression between the United States (US) and Iran. Higher oil prices de-anchor inflation projections that prompt Federal Reserve (Fed) interest rate expectations, a scenario that is favorable for the US Dollar.
This week, investors will pay close attention to the European Central Bank (ECB) monetary policy announcement on Thursday, in which policymakers are expected to leave policy rates steady. In the June policy meeting, officials raised key rates by 25 basis points (bps), but guided a meeting-by-meeting approach.
Latest remarks from ECB officials signaled that more interest rate hikes could be needed as price pressure will likely stay above the central bank’s 2% target for longer.
EUR/USD technical analysis
EUR/USD trades slightly lower at 1.1437, holding a mildly bearish near-term tone as it remains just under the 20-period Exponential Moving Average (EMA) at 1.1441, which now caps the upside. The price action suggests a Bearish Flag formation, which is a trend-continuation pattern. As price action suggests that the prior move was on the downside before a consolidation, the odds of further decline are significantly higher.
The Relative Strength Index (RSI) at about 47 leans slightly soft and hints that upside momentum is waning while the pair trades beneath its immediate dynamic resistance.
On the topside, initial resistance is located at the 20-day EMA around 1.1441, and a sustained break above this cap would expose the channel top near 1.1516 as the next hurdle. On the downside, the lower boundary of the rising channel at 1.1393 is the first notable support, and a decisive drop through this floor would weaken the constructive channel structure and open the door for further decline towards 1.1300.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
Brown Brothers Harriman’s (BBH) Elias Haddad expects New Zealand Q2 Consumer Price Index (CPI) to remain well above target, with quarterly and annual readings only slightly below the RBNZ’s own projections. Combined with a firmer domestic growth outlook, this supports additional rate hikes after July’s move to 2.50%. Swaps discount 100 bps of tightening over twelve months, taking the OCR near the top of the estimated neutral range.
Above-target CPI expected to support the NZD
"Headline CPI is expected at 1.4% q/q (RBNZ projection: 1.6%) vs. 0.9% in Q1 to be up 4.0% y/y (RBNZ projection: 4.2%) vs. 3.1% in Q1."
"Above target inflation and a more favorable domestic growth outlook argue for additional RBNZ rate hikes which is NZD supportive."
"The swaps curve price in 50bps hikes by year-end and a total of 100bps of tightening over the next twelve months to 3.50% - near the top of the RBNZ estimated neutral range (2.20%-4.10%)."
"At its last July 8 meeting, the RBNZ raised the Official Cash rate (OCR) 25bps to 2.50%, the first hike in three years, and indicated that “further OCR increases appear likely at upcoming meetings.”."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
- AUD/USD bounces up strongly on Monday and returns above 0.7000.
- Rumours of efforts to de-escalate Iran's conflict have soothed investors' fears of an all-out war.
- The US Dollar remains on its back foot amid fading hopes of immediate Fed rate hikes.
The Australian Dollar (AUD) appreciates against the US Dollar (USD) on Monday as comments from Iranian Foreign Minister Esmaeil Baghaei offered a glimmer of hope for de-escalation in Iran and pushed Oil prices down from one-month highs. The AUD/USD pair has jumped above 0.35% on the day, returning above 0.7000 and potentially printing a bullish engulfing candle in the daily chart.
The US launched a series of attacks on Iran for the ninth consecutive day on Monday in retaliation for US soldiers killed in Iranian attacks this weekend. Concerns of an all-out war, however, have been eased by the Iranian Foreign Minister’s comments suggesting that mediators keep working to resume peace talks.
The US Dollar, on the other hand, has opened the week on a weak footing, still weighed down by the soft US inflation figures released last week. June's Consumer Price Index (CPI) and later Producer Price Index (PPI) numbers showed a larger-than-expected cooling of inflation, dampening investors’ expectations of a Federal Reserve (Fed) rate hike in July,
In Australia, the central bank hit the pause button in June following three rate hikes earlier this year and hinted at a “wait-and-see” stance in the coming months to assess the economic impact of monetary tightening. The resumption of hostilities in Iran and the rebound in Oil prices, however, are likely to add pressure on the bank to hike rates for a fourth time this year.
Against this background, it will be interesting to see how long interest rate expectations can keep the geopolitical uncertainty in the background to support the Aussie's near-term bullish trend. Australian Employment and business activity figures, due on Thursday, might help to answer that question.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
According to a senior Iranian official, mediators have proposed a 10-day cessation of strikes to find ways to revive the interim deal between the United States (US) and Iran. This is in connection with earlier headlines, in which Esmaeil Baghaei Hamaneh, a spokesperson for the Ministry of Foreign Affairs of Iran, confirmed receiving proposals of diplomatic efforts from several intermediaries.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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