Oil swings and euro trades near parity against dollar as Fed chief says rates will rise

The US central bank is likely to continue tightening its monetary policy, Jerome Powell said at the annual gathering in Jackson Hole, Wyoming, on Friday

US Federal Reserve chairman Jerome Powell is expected to send a clear message the fight against rampant inflation is not over. AFP

Oil prices fluctuated on Friday as US Federal Reserve chairman Jerome Powell warned that interest rates will continue to rise amid high inflation, while the euro continues to trade near parity against the US dollar.

Brent, the benchmark for two thirds of the world's oil, was trading 0.83 per cent lower at $98.52 a barrel at 6.46pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was down 1.19 per cent at $91.42 a barrel.

"Reducing inflation is likely to require a sustained period of below-trend growth," Mr Powell said at the annual gathering in Jackson Hole, Wyoming, adding that the US economy would need a tight monetary policy “for some time” to beat record-high inflation.

"These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain," he said.

Oil prices have been volatile this year, with Brent shooting to about $140 a barrel in March after the outbreak of Russia's war in Ukraine and subsequent supply concerns.

Western countries imposed sanctions on Russia, the world's second-largest energy exporter, because of its military offensive in Ukraine.

In a research note on Thursday, strategists at Swiss bank UBS said oil prices could rebound to $125 in the coming months due to tight market supply, declining spare capacity and low oil inventories.

They said the latest remarks by Saudi Energy Minister Prince Abdulaziz bin Salman — about a disconnect between the price of oil futures and market fundamentals, and the fact that Opec+ has the means to deal with market challenges, including cutting production at any time — suggested that there was “a desire to defend oil prices to stay above the level of $90 per barrel”.

Market fundamentals, spare capacity below 2 million barrels per day and oil inventories at a multi-year low all support higher prices, the authors said.

Demand for crude outside the Organisation for Economic Co-operation and Development, whose members account for 54 per cent of total demand globally, remains strong.

The Opec+ alliance of 23 oil producers, led by Saudi Arabia and Russia, will meet on September 5 to assess the market and future production levels.

The producer group agreed earlier this month to raise production by another 100,000 bpd next month amid pressure from major consumers, including the US, to cool prices.

It had previously increased output by 648,000 bpd in July and August as part of measures to unwind about 10 million bpd of cuts introduced in May 2020 to counter the demand slump caused by the coronavirus pandemic.

Meanwhile, European countries are front-loading their purchases of Russian crude oil before the start of an embargo on December 5 and another deadline, on February 5, on refined products.

The euro was trading near parity with the US dollar on Friday, after hitting its lowest level in 20 years earlier in the week, amid growing recession fears and mounting risks to the supply of natural gas from Russia to Europe.

The single currency, which came into physical circulation in 2002, was trading at 0.9995 to the greenback on Friday at 3.40pm UAE time after falling to 0.9910 on Tuesday this week.

The euro previously fell to below parity with the greenback in early July and has shed about 12 per cent against the dollar this year as households and businesses are squeezed by record inflation.

“The dollar index is holding on to its strength [as] the euro-to-dollar [rate] continues to orbit near the parity level while traders are hoping that the pair will stay above parity,” said Naeem Aslam, chief market analyst at Avatrade.

“The hawkish message tone from the Fed could make the dollar index higher, thus creating more issues for the euro-dollar bulls. If the price continues to fall, the next major support could $0.95."

The Fed has raised interest rates twice by 75 basis points as it vies to fight inflation, which is at a four-decade high.

The weakness in the euro spilt over into other markets, causing sterling to fall against the greenback to 1.1730 earlier this week.

The pound has gained some ground but remains weak and was trading at 1.1824 at 3.40pm UAE time.

The British pound is down about 12.5 per cent against the greenback since the start of this year.

UK inflation will almost double to 18.6 per cent in January 2023 — its highest rate in half a century — as Europe’s energy crisis results in British bills becoming prohibitive for many consumers, Citi economists have projected.

Last month, CPI inflation struck a 40-year high of 10.1 per cent, with the Bank of England projecting a further rise to above 13 per cent in October before a decline.