Conflict in the Middle East is already pushing up the cost of living in countries around the world, with Europe hard hit. Economists warn that it could get much worse if the war rumbles on into the summer.
The euro and pound continued to be hit hard last week, as the dollar surged in the wake of large hikes in the price of oil and gas. In the last month, the euro has weakened by over 1.8% against the dollar, with little sign of an imminent rally. The euro has still strengthened against the dollar by nearly 7% over the last year, but at the moment the direction of travel is all one way.
For its part, the pound also fell back against its US counterpart as inflation fears returned. Sterling also slid against the euro, with the EU currency considered a safer heaven for investors.
Interest rate expectations firm up
The European Central Bank (ECB) held interest rates steady at 2.15% last week but also cut growth forecasts for the bloc and raised the inflation outlook. As the war continues, interest rate rises appear more and more likely, with traders now pricing in two – and possibly three – hikes this year.
The Bank of England (BoE) also held rates steady last week while projecting rising inflation, which again suggests that monetary tightening may soon be on the cards. Conversely, investors currently expect one rate cut by the US Federal Reserve (Fed) this year, though policymakers were at pains to highlight the unpredictability of current circumstances.
The week ahead
Money markets will continue to focus on the impacts of war in the Middle East this week, especially on oil and gas prices. President Trump talked about winding down the war last week, but contradicted that later by threatening to destroy Iran’s domestic energy infrastructure if the Strait of Hormuz was not immediately reopened to shipping. Traders will be watching anxiously.
Elsewhere, PMIs (snapshots of economic health based on surveys of business leaders) in the EU, UK and US (all Tuesday) will be raked over for signs that the impacts of the continuing conflict are filtering down to factory and office floors.
