Global currency markets and equity indices are reacting to the recent surge in oil prices and bond yields, with implications for inflation rates, according to reports from Wednesday. Crude oil prices have been on the rise since Saudi Arabia and Russia announced on Tuesday that they would extend production curbs until the end of 2023, leading to a 10-month high for WTI and Brent testing the $90.00 level for the first time since November 2022.
This increase in oil prices is expected to exert upward pressure on headline inflation rates, as the base effects for inflation have been favorable for most of 2023 due to falling energy prices on an annual basis. As these trends fade in the coming months, there is a risk of a fresh increase in inflation expectations and further upward pressure on wages.
Central banks are likely to find it more challenging to consider any interest rate cuts in this environment, as there are concerns that rates may need to be increased further. This could undermine the narrative of monetary easing during 2024.
In currency markets, the Pound to Dollar (GBP/USD) exchange rate dipped to 11-week lows at 1.2530 before recovering to 1.2575 on Tuesday. On Wednesday, GBP/USD was able to maintain around 1.2570, although confidence remains fragile due to high oil prices and comments from Bank of England officials.
The Euro (EUR) also came under renewed pressure amid concerns about the Euro-Zone outlook and a firm dollar. The Euro to Dollar (EUR/USD) exchange rate dipped to 12-week lows near 1.0700 before a tentative recovery to 1.0730.
Meanwhile, the US dollar benefited from higher bond yields and overall fragile risk conditions, with the dollar index posting its highest level for 25 weeks before a limited correction as the Chinese central bank supported the yuan.
The performance of other currencies like the Yen, Australian dollar, New Zealand dollar, Canadian dollar, and Swedish krona was also impacted by various factors including oil prices, GDP data, verbal intervention from Japanese officials, and policy decisions from central banks.
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