What is oil’s real effect on the markets?
A frustrating night of
action for both bulls and the bears in the FX market as EUR/USD
makes serpentine moves through the 1.2300 level supported on one side by Central
Bank buying and offered on the other by speculators looking to generate further
dollar strength. On the economic front the one fact that is becoming universally
clear is that contrary to popular belief oil is having a disinflationary effect
on prices as reduced consumer demand is limiting pricing power of all producers
outside of the energy sector. Data from Germany, France and UK all indicate that
core inflation remains tame, contained below the 2% barrier.
It will be interesting to see if today’s US PPI
data confirms this global trend. If it does, it will serve as a serious
challenge the inflation fighting bias of the Fed. We have long argued that
continued tightening by the Fed in the face of higher energy costs and miniscule
wage growth threatens to tip US into a recession especially if it destroys
demand in the vital housing sector which has been responsible for fully 25% of
all new job growth. With the market adamantly convinced that Fed rate hikes will
persist, the dollar continues to gain strength from yield differentials.
However, if future economic data shows a further slowdown in global demand, Fed
monetary policy will have to turn accommodative once more to stave off a
contraction in US GDP.
Boris Schlossberg serves as Senior Currency
Strategist with Forex Capital Markets in New York, the largest retail forex
market maker in the world. He is a monthly contributor to SFO Magazine with
articles focused on understanding proper risk management, trader psychology and
true market structure. He is also a featured expert at
www.fxstreet.com and a frequent
commentator for the Marketwatch From Dow Jones Currency and Bond Report
sections.