Elevated oil prices significantly affect foreign exchange reserves

Last week proved to be very challenging for global financial markets, which are hoping for a resolution to the ongoing conflict in the Middle East.

The war has resulted in significant disruptions worldwide due to supply constraints, particularly as shipping activities have stalled because of the virtual closure of the Strait of Hormuz.

While, Central bank policymakers from eleven institutions, including the Reserve Bank of Australia, the Bank of Japan, Taiwan’s CBC, Bank Indonesia, the Swiss National Bank, Sweden’s Riksbank, the European Central Bank, the Bank of England, the Bank of Canada, the Federal Reserve, and Brazil’s Central Bank are set to convene this week to discuss interest rate decisions.

The central banks, which were already grappling with unsettled trade issues with the US, are now anxious about the consequences of the ongoing war in the Gulf region. They face the daunting task of assessing the future landscape in the middle of the uncertainties regarding oil supplies and product shipments.

In recent years, central banks have struggled to manage inflation, which was nearing targeted levels but is now at risk of rising again due to spiking oil prices. This increase could potentially lead to recession and stagflation if the conflict does not improve. Elevated oil prices significantly affect foreign exchange reserves, an important consideration for central banks. Australia and Japan are currently in the process of raising their policy rates in response to inflation.

However, UK, US, and Canada, which had been lowering their interest rates, may need to reconsider this approach unless clarity emerges. The resolution of the situation in the Middle East, which is the primary disruptor of supplies, remains critical.

The ongoing US-Israel conflict with Iran, now in its third week, has contributed to economic uncertainty, negatively impacting oil supply and shipments via the Strait of Hormuz. Attacks on regional infrastructure could be more damaging than anticipated.

Oil prices, which had initially surged to USD 120 a barrel before dropping below USD 85 on hopes for a quick resolution, have not stabilised as expected.

In response, Europe and the US have opted to release from 400 million and 172 million barrels, respectively, from their strategic petroleum reserves (SPR), but this action has proven ineffective with prices rising nearly USD 20 from the lows.

Additionally, in an effort to facilitate quicker deliveries and address the backlog, the US Treasury has granted a 30-day waiver on floating Russian oil already at sea until April 11, allowing for the purchase of Russian oil and petroleum products, although new loading is prohibited.

Currently, well over 30 ships are estimated to be in global waters, potentially delivering more than 100 million barrels of crude oil. Estimates indicate that 30 million barrels of Russian oil have been contracted at a premium of USD 2 to USD 8 over Brent. Despite these efforts, oil prices continue to surge.

Further pressure on oil prices may arise as US forces have already bombed Iran’s primary oil export terminal on Kharg Island. This will significantly impact not only Iran economically but also China, which relies on 1.5 to 2 million barrels of oil from that region.

GOLD

Gold prices, which spiked at the outset of the Middle Eastern conflict, are now struggling to reach new heights. Factors hindering its rise may include high prices and liquidity challenges. As oil prices are projected to reach between $ 150 and USD 200, investors may opt to invest in oil instead of gold. In such uncertain times, cash tends to be favored, leading to an increase in money in circulation.

It’s not only gold that has declined. Stock markets are also feeling the heat. The risks posed by higher inflation and increased borrowing costs are weighing down on market sentiments, contributing to the strength of the US dollar, which is also putting pressure on major currencies.

While gold is typically viewed as a safe haven asset during economic volatility, it may currently be facing liquidity constraints.

Central banks generally want to maintain market liquidity and may have temporarily postponed their strategies for building portfolios or may wait for more favorable entry points.

Nonetheless, gold may be on the lookout for a correction, which could be brief, and the market might witness a sharp upward rally once buyers feel it is the right moment to invest.

As a result, the risk associated with purchasing gold during price dips will continue to exist, but market conditions will remain unstable.

Economic data to watch next week:

Upcoming economic indicators include the US Empire State Manufacturing Survey and the RBA monetary policy decision on Monday. Tuesday will feature US Pending Home Sales, followed by US PPI, monetary policy decisions from the Bank of Canada, Federal Reserve, and Bank of Japan on Wednesday. On Thursday, the Swiss National Bank, Bank of England, and European Central Bank will announce their monetary policy decisions, along with weekly U.S. jobless claims, Philly Fed Survey, and US New Home Sales data.

WEEKLY OUTLOOK - MAR 16-20

GOLD @ USD 5019— If gold fails to surpass USD 5130-90 range, it may face a decline towards USD 4910-20 and a breakdown could push it down to USD 4850.

EURO @ 1.1416— Euro is nearing an important support level at 1.1340. If it can hold this support, it is expected to rise toward 1.1560. However, if this support level fails, it could drop to 1.1280.

GBP @ 1.3226— Pound Sterling should remain above 1.3160 in order to make a correction, but it must rise past 1.3390 to reach 1.3450. Otherwise, it could fall to 1.3080.

JPY @ 159.73— The $-YEN pair faces a couple of resistance levels at 160.10 and 160.60. A correction is anticipated, but it must drop below 158.80 to reach 157.20. However, a breakout above 161.20 would be positive for the pair.

Copyright Business Recorder, 2026