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Middle East Crisis Could Keep ECB, BOE From Cutting

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The ongoing conflicts in the Middle East continue to threaten shipping despite efforts by Western nations to secure passage through the Red Sea. The latest in the saga is that over the weekend, the largest shipping company in the world, Maersk, confirmed it would no longer transit the Red Sea for the foreseeable future.

As discussed previously, the increased transit times could snarl supply chains and increase costs of goods headed to Europe in particular. This comes amidst reports that EV sales in Europe have been limited by a lack of ships to transport cargo from the Far East. With cargo now rounding the southern tip of Africa, the lack of available ships will only become more acute.

Authorities Acknowledge There is a Problem

The first high-ranking official to publicly address the issue of higher prices was UK Chancellor Jeremy Hunt over the weekend. In the midst of Prime Minister Sunak’s campaign push to lower taxes and by extension inflation, Hunt warned that the attacks on shipping in the red sea could raise prices. What that means for the forex markets is that with higher inflation, the BOE would be less likely to pivot towards cuts.

Although EU officials haven’t addressed the potential inflation impact yet, the situation has a similar effect on the shared European economy. Around 40% of the Asia-Europe trade goes through the Bab el Mandeb Strait, the choke point on the Red Sea that is overlooked by Houthi rebels in Yemen who have been attacking ships. Until recently, the market was pricing in a rate cut by the ECB as soon as March. But, as the conflict in the Middle East drags on, that conviction has been fading.

It’s Far from Over

In a sign of the risk of further escalation, Hezbollah militants in Lebanon fired around 40 rockets into northern Israel over the weekend. The group said it was the “start” of its response to the killing of one of its leaders in Beirut last week. The shipping crisis is seen as a result of the Houthi authorities looking to apply pressure on Israel, and any widening of the conflict could translate into a prolonging of it as well. That could see the risk of attacks on shipping lasting longer, and potentially impacting the price of imported goods in the EU and the UK for the “foreseeable” future, to borrow a phrase from shipping companies.

Meanwhile, it seems that the conflict in Gaza still has quite a long time to go. IDF Chief Spokesman Hagari over the weekend provided an update on Israel’s military operations. He said that Hamas as a fighting force had been destroyed in northern Gaza, and now efforts were turning to the central and southern Gaza Strip. The implication being that the conflict that has been going on for three months now still has quite a bit more to go.

Where To From Here

Italian media reports that traffic along the Suez Canal fell by 38% in the last three weeks of December, with the trend continuing at the start of the new year. Houthi leadership has vowed to expand the scope of the ships it targets, saying that any nation involved with the US-led Red Sea coalition could see its ships targeted. The US said that 20 countries were supporting its initiative to secure shipping, including France, the UK, The Netherlands and Italy. But eight of the countries declined to be named publicly.

US Defense Secretary Lloyd Austin is the public coordinator of the effort, but recently was reportedly hospitalized for a week over a condition that hasn’t been revealed. That adds additional uncertainty to the endeavor to secure shipping through the Red Sea. Even with the military presence, shipping companies still see the area as too risky. With it being unlikely that the situation could be resolved quickly, pricing pressures in Europe and the UK could remain in place for a while. That could derail potential moves by the BOE and the ECB to move towards an easing bias.

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