In addition, there are other countervailing economic factors. The strength of sterling is one such factor that may serve to dampen imported inflation, and itself is tantamount to some degree of tightening. Interest rates have risen, which reflects the market doing some BOE’s work, which extends the time that it can stand pat.

Switzerland and Norway central banks hold policy making meetings, but neither is expected change policy. The Swiss first line of defense in case safe haven inflows spurred by by the ECB's actions, is the euro floor/fran cap at CHF1.20.  Only if this is threatened will  the SNB be forced to consider a monetary policy response.

However, the euro is trading well within the CHF1.2150-CHF1.2250 range that with a few exceptions has marked that has confined the price action.  Norway's economy has disappointed, but price pressures are sufficiently firm (underlying rate of 2.3% in May) and base effects point to a further increase in June that the Norges Bank will stand pat.  The euro is absorbing buying near NOK8.10. Yet support has been frayed and this has removed the sting of a convincing break. The next band of support will likely be seen in the NOK8.05-NOK8.07 area.

Geopolitical events loom large.  At the beginning of the year, observers were most concerned about the territorial dispute between China and Japan.  Japan's Prime Minister Abe made facile analogy between 1914, the start of WWI and 2014.  However, events in Ukraine and Russia's annexation of Crimea brought attention to central Europe, where for several years Russia has used the carrot and the stick to cajole when possible, and intimidate when not, several of its neighbors, including Georgia, Moldova, and Ukraine.

Neither of these two issues has been resolved, but a new crisis has emerged that in many ways is even more threatening immediately.  Radical Islamists, a splinter group from Al Qaeda has taken advantage of the lack of support among the Sunnis for the Maliki government and a power vacuum to spread from Syria to Iraq and then sweep south to Baghdad.  After a slow start, the Iraqi security forces moved to deter an attack on the capital.  The money and munitions captured in the military action may greatly enhance their reach and capability

The immediate fear is over a disruption of oil supplies.  At this juncture, the market is appears to be pricing in a risk not the real thing.  The broader geopolitical implications, though are very fluid.  Almost regardless of the particular outcome, Iran will likely see its influence enhanced.

Russia benefits not only from energy insecurity and higher prices, but also by what seems like another setback to US strategic interests.  Moreover, there is some risk that the territorial integrity of Iraq is not preserved and this too serves Russian (and possibly Chinese) interests insofar weakens what both nations seem to think of as the US-led world orders, which does do justice to China's accomplishments and Putin's ambitions.

Higher oil prices can have secondary impacts that lead upward pressure on prices (inflation).  Yet, few countries that are experiencing disinflation (lowflation) will likely welcome the rise in oil prices.  Rising oil prices act as a headwind to growth.  Higher oil prices may weigh on equities and support bonds.

Marc Chandler​

Associate Professor at 
New York University Center for Global Affairs

​Marc to Market​