WTI crude oil futures are holding near $92 a barrel on Wednesday, after hitting a 7-year high in the previous session, as investors reflect on U.S. sanctions against Russia and signs of progress in nuclear negotiations with Iran. Biden announced sanctions against Russia on Tuesday, targeting the country's government debt and institutions. That could lead to increased volatility in the oil price market.
Daleep Singh, deputy national security adviser, also said the U.S. is in talks with oil exporters and importers to mitigate the effects of escalating hostilities and resulting sanctions, including the continued use of strategic oil reserves. The potential return of Iranian oil could also impact prices after several diplomats signaled that a decision on the resumption of the Iran nuclear deal is likely to be made this week, as a potential deal could increase supply in the market by more than 1 million barrels per day.
Meanwhile, in the currency market, the reaction to recent events seems to have been muted, especially looking at the behavior of EUR/USD. In the last week of February, the euro held at $1.13. Investors appear to be looking for further clues on the European Central Bank's monetary policy as price pressures in the Eurozone continue to mount, but there is a growing likelihood that the central bank will take a more cautious approach due to the risks associated with the Ukraine crisis. Money markets continue to expect the ECB to raise interest rates in July by 10bp, but expectations of a 50bp hike by the end of the year are diminishing.
In contrast, more interesting developments seem to be taking place away from Europe, as in New Zealand. The central bank there, the Reserve Bank of New Zealand, raised the official interest rate by 25 basis points to 1 percent and said it is prepared to raise the rate in further larger steps if necessary in the coming quarters.
The central bank also said it would begin gradually reducing its bond holdings under its large-scale asset purchase program, both through bond maturities and bond sales. This is the third time the RBNZ has raised interest rates since October in an effort to prevent inflation from becoming entrenched in decades of high inflation. In addition, the central bank expects the cash rate to reach 2.2 percent by the end of this year, up from an earlier forecast of 2.1 percent, and also expects it to reach 3.3 percent in the final quarter of 2023, much higher than the 2.6 percent forecast in November.
As a result, the New Zealand dollar was able to strengthen in the foreign exchange market this morning, where it appears to be at its highest levels against the US dollar since the second half of January (near 0.6800).
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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