With tensions in the Middle East reaching fever pitch, we’ve finally seen the market react today. Investors have lined up to put their money in safer assets on the back of the geopolitical risks with the US dollar, Swiss franc and Japanese yen all benefitting from the global uncertainty.
Libya, the latest in a string of countries across northern Africa and the Middle East to revolt against its oppressive regime in recent times, is teetering on the edge of civil war as Muammar Gaddafi, the tyrannical ruler, desperately clings to power saying that he will fight “until the last bullet” - a phrase which I’m sure won’t sit well with the protesters looking to give their country the progress it needs after decades of mismanagement.
The pound fell against its safe-haven US counterpart today as investors sought to hedge the risk of a potential fall-out from Libya. The pound gained against the euro in early trading on the back of this US strength, however ceded its gains on the back of hawkish comments from ECB policy maker Yves Mersch. Mersch said that he would not be surprised if the bank “sharpened its tongue on inflation”.
The comments saw a huge swing in the euro’s favour perhaps alerting the market that there are indeed big decisions to be made on interest rates after the news of the unrest in the Middle East quite rightly stole the headlines.
The ECB is still expected to trail the Bank of England in raising interest rates, but Mersch’s comments have certainly done the euro no harm. The gains come despite concerns raised by the Bundesbank Governor and one time ECB president candidate Axel Weber, who fired a parting shot at the ECB’s bond purchasing programme on the same day that it was revealed that they bought 24% of Portuguese debt in the auction 2 weeks ago.
Despite waning enthusiasm for the pound off the back of falling risk sentiment, the market will now be gearing itself up for the results of the MPC’s minutes which will be revealed tomorrow.
Edward Knox
Analyst - Caxton FX
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