Market Drivers March 26, 2015

Saudis bomb Yemen oil spikes driving dollar lower
UK Retail Sales 0.7% vs. 0.4% eyed
Nikkei -1.64% Europe -1.39%
Oil $51/bbl
Gold $1210/oz.

Europe and Asia:
GBP UK Retail Sales 0.7% vs. 0.3%

North America:
USD Weekly Jobless 8:30

USD Flash Services PMI 9:45

It was a wild night of risk aversion as oil spiked up by more than 4% on the back of news that Saudi Arabia was bombing Yemen and dollar took a tumble with yen getting the biggest benefit of the flows.

The situation in the Middle East escalated precipitously as Saudi Arabia and it allies began bombing rebel positions in Yemen and even stated that they were willing to commit ground troops to restore order in the country. The Shiite rebels backed by Iran threaten to destabilize Yemen and its US backed president Abd Rabbah Mansur Hadi.

The conflict in Yemen is sectarian and multi sided with Al Queda ISIS Iranian and pre-Arab spring elements all jostling for control. The end result is that Yemen may turn into yet another hot spot of chaos in the Middle East that could suck in one of United States most important allies into a protracted guerilla war.

The news has sent understandable concern through the capital markets with both Nikkei and European bourses dropping by more than 1.5% on risk aversion fears. The dollar which was already under some profit taking pressure this week tumbled further, with USD/JPY dropping to 118.30 in early London trade while EUR/USD rose to a high of 1.1050.

The EUR/USD recovery has taken many market participants by surprise, but given the velocity of its fall the short covering squeeze in the pair could see more upside with euro longs eyeing the key 1.1100 level to knock out late dollar bulls that are feeling more and more heat every day.

On the data front, the only report of note was the UK Retails Sales number which beat forecasts by printing at 0.7% vs. 04% eyed. The prior data was also revised upward from -0.3% to 0.1%. The gains were broad based and suggest that the UK consumer is finally starting to spend which bodes well for Q1 UK GDP. Overall the UK economy continues to perform relatively well against its G-7 counterparts but the market remains skeptical about any change in BoE policy and cable therefore remains quagmired below the 1.5000 level.

With only weekly jobless claims on the docket today the markets are likely to remain focused on geopolitical events and cross market flows. The dollar appears to have stabilized for now, but if crude resumes its climb the greenback could weaken further as the day proceeds.

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