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Forex: The permanence of lower oil

The last thing the oil market needs now is more supply but with the lifting of sanctions from Iran that it what it’s going to get from the country with the fourth largest amount of proven oil reserves. The oil price (Brent) is now in upper twenties, just above the USD 28pb level, with 27 handle seen briefly earlier on. The low oil price is proving to be a growing headache, for the traditional Middle East producers and their budgetary numbers, together with the newer shale producers (more initial investment) as well as central banks. The latter have forecasts that project a sharp bounce in headline rates of inflation in the coming months as the base effects from the fall in energy prices twelve months ago falls out of the calculations. If the current falls in energy prices are sustained, then this could well constrain the tightening forces for some (US), push them further out for others (UK) and potentially instigate more easing measures (Eurozone).

For currencies and equities, it remains a risk averse environment. Equities are once again starting the week on the defensive in Asia, with this is instigating a cautious start to the session in Europe. US markets will be closed today for Martin Luther King Day, which will give time to reflect on the recent run of softer data which has scaled back expectations of Fed tightening in the first half of 2016. It’s the commodity currencies that have suffered the most year to date, the Aussie and kiwi in particular, with the yen pushing ahead as its safe haven status comes to the fore. Sterling has managed a modest bounce at the start of the session to the 1.43 level, but remains the weakest performer apart from the dollar bloc. The US holiday means that the data calendar is relatively light today. Focus is already turning to China GDP data, released overnight tonight, together with the latest retail sales and industrial production data.

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