The repercussions of the Israel-Palestine conflict are also reverberating through the financial world, including the forex markets. There are fluctuations in the global trade relationships and currencies like the Shekel and USD are already facing the heat.
Let’s go into more detail about what this current global conflict could potentially mean for the forex market.
Shekel appreciation
On October 9, the Bank of Israel announced its plans to dispose of up to $30 billion in foreign currency in response to the Israel-Palestine conflict, marking its first foreign exchange sale. This move has been aimed at stabilizing the financial situation during the conflict and has resulted in a positive market response, particularly in the recovery of the Israeli currency, the Shekel, from initial declines.
The central bank expressed its intention to continue intervening in the market to manage Shekel exchange rate volatility and maintain essential liquidity for smooth market operations and currency appreciation. Additionally, the central bank is committed to providing liquidity through SWAP mechanisms, allocating up to $15 billion, and maintaining vigilance to monitor market developments and use available tools as necessary.
Rise in oil prices, affecting the Dollar
The Israel-Palestine conflict has raised concerns about the potential for a surge in oil prices. Brent crude oil futures surged by nearly 5% to $88.76 a barrel, and US WTI crude rose 5.1% to $87.02 a barrel on October 9. This situation poses a risk to stocks and currencies (especially the US Dollar) and could challenge the recent US disinflation narrative.
**Past performance is not a reliable indicator of future performance.
While the oil market impact of the conflict is still uncertain, it is important to note that, at present, it is unlikely to cause major disruptions in oil supplies, which would impact major oil importers and appreciate the US Dollar exchange rate due to the direct relationship between oil prices affecting the US Dollar due to increase in demand.
However, OPEC nations are expected to be cautious not to increase oil prices significantly, as they have agreements with the USA to maintain price stability. Hence, the surge in oil prices and the further US Dollar depreciation might just temporarily impact the forex market.
Impact on gold prices and inflation
As the conflict intensifies, gold prices may also continue to rise due to its less-risky asset nature, further depreciating the US Dollar due to another inverse relationship between the two.
A continuation of rising oil prices can lead to higher inflation. Central banks of several countries, such as the United States and European Union member countries, may respond to inflationary pressures by raising interest rates. This can have a negative impact on these country's currencies (the USD and EUR) as abrupt interest rate hikes will lead to uncertainties and fluctuations in forex markets. The increase in oil prices will also directly impact the cost of living, as consumers may pay more at the pumps.
Appreciation of gold CFDs
The conflict can prompt investors to seek less risky assets. When gold prices rise, it is often accompanied by a depreciation of currencies, particularly those associated with countries heavily dependent on commodity exports or with strong ties to the global commodity market, such as Australia, Canada, and New Zealand. However, the increase in gold CFD prices has affected not only the currencies of these countries but also the USD, as the two have an inverse relationship.
Appreciation of the Dollar and depreciation of the Euro
Overall, when compared to the EUR or GBP, the USD has appreciated amidst the conflict. However, the USD has weakened against other forex currencies, such as the Swiss Franc or the Australian Dollar. This has happened primarily due to expectations that the US Federal Reserve will maintain higher interest rates for an extended period to combat inflation, making the USD more attractive to investors.
Will the impact on the forex market be permanent?
While it may be a temporary blow, the Israel-Palestine conflict can have ripple effects on the forex market. It can lead to a rise in oil prices, impacting currencies, especially those of commodity-dependent nations. These currency movements will further depend on the conflict's duration and intensity, affecting global trade and central bank policies. The ongoing conflict keeps forex markets sensitive to geopolitical developments, highlighting the intricate relationship between global politics and currency fluctuations.
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