The domino effect has certainly been the talk about town when it comes to global affairs as the one thing concerning governments around the world was the spill over from Egypt into the rest of the Arab world. While western governments openly praise the people's choice to rise up in the face of dictatorship and cry out for democracy, there is undoubtedly a feeling that with the current economic sentiment, there will be an immediate short term impact.
Egypt itself, while not being a big contributor to the rest of the world in oil exportation, has a key role in the supply chain and as such had oil traders concerned enough to push prices to new highs over concerns of supply issues. Libya however ranks in the top 20 of oil exporting countries and production could be seriously affected. In comparison, it is estimated that Saudi Arabia, the world's number one producer of oil, exports over 8 million barrels per day; Libya exports 1.5 million. The fact that the uprising seems to be spreading across the North African and Middle Eastern countries is of most concern as Saudi Arabia is the key stone which holds the oil production supply bridge intact. Should Saudi Arabia find itself anywhere along the uprising chain, commodity prices could very well be sustained at levels that could tip the balance of the ever fragile recovery of the global economic system.
Oil jumped again to just over $90 before retracting and $92.58 is still in sight for long targets. Although price did retract to $83.8, the lowest since last November, support seems to be strong at $88.26 and $86.73
Western countries are facing inflation pressure and small businesses and consumers are feeling the squeeze as job growth and disposable income is contracting in the face of price rises. Figures released last week disclosed the contraction of the French, German and Italian economies and as governments across the UK and Europe tackle the deficit by imposing spending cuts, concern over inflation has finally given way to proposed interest rate increase throughout the year, adding further constraints on the economies across the UK and Europe.
The Bank of England could raise the interest rates as many as three times during the year and by as much as 75 basis points making borrowing more expensive for the UK consumer and small businesses at levels that will be felt. Although the UK is struggling over the tax increase, spending cuts and rising inflation, it is however due to the aggressive stance on deficit reduction that has steered the UK away from the pot holes that its European counterparts have fallen into; namely Greece and Ireland. The GBP rallied again the USD in recent weeks helped by the announcement of potential interest rate hikes.
The GBP/ USD is likely to find resistance at 1.6472 should it break through current resistant levels at 1.6290. Should 1.6472 fail to hold as resistance then 1.6673 is the next level at which sellers are most likely to enter the markets with 1.7089 as a long term bull target beyond that level.
Buyers are most likely to come in at 1.5998 and then 1.5739 should this level fail to hold as support. If this level is broken by selling pressure then 1.5583 is a likely bear target for buying to occur.
Raising the interest rates will add to the big squeeze of small businesses that have borrowed against the low interest rates and are seeing revenue decrease with the rising cost of supplies. Passing this on to consumers in the form of higher prices will only serve to reduce sales in the short term and then there is a danger of a vicious circle dominating the economy, as when things get a little better, businesses may try to increase prices again to gain back lost revenue and further add to inflation.
The situation although tough, is not without respite. In the short term, UK and European consumers are going to find the going tough while the deficit reduction and world consumption of raw materials and the unrest in the Arab world means essentially working more for less and cycling through the tough times will take its toll.
However the price increase from recent times can be in part, attributed to the rising VAT that the government deemed necessary to increase tax revenue and fight public debt and this will even out in due course. The Arab world currently is in turmoil, however the panic over the potential disruption to oil production will come to a head and the emerging economies that are growing and consuming materials will not be sustained at the same level of growth. In essence, although this may take time, the economic pressure from the global economic machine will equalise and GDP growth will eventually balance out inflation. Putting this another way, there is a light at the end of a very very long tunnel.