Over the past month, the Pound Sterling to Emirati Dirham (GBP/AED) exchange rate was trending within the range of 5.6689 to 5.7696.
In general, the Emirati Dirham has softened versus its major peers in recent weeks thanks, primarily, to tanking crude oil prices. The price of oil has dropped considerably after sanctions on Iran’s production were lifted in favour of the nation curtailing its nuclear program. The massive amount of oil Iran will add to the market will contribute to an already growing global glut. As one of the foremost oil exporters, the United Arab Emirates have been feeling the pinch.
Also contributing to the AED depreciation was the shock People’s Bank of China (PBoC) currency intervention. The fallout from the PBoC’s devaluation of the Yuan has seen emerging markets suffer considerably and the combination of fears regarding China’s economic slowdown and plunging crude oil prices has had a marked impact on trader risk appetite.
Such has been the depreciation in oil prices, the UAE’s finance ministry has decided to introduce value added tax in addition to the federal-wide corporate taxation already in place. Although the Gulf Cooperation Council (who will provide the framework for the introduction of VAT) will give an 18-month grace period, the rising price of goods may add to inflationary pressures and cause the Central Bank of United Arab Emirates to ease policy.
Inflation in the UAE rose to 4.4% in July, the highest since February 2009. The higher-than-expected inflation growth had been linked to a 10% increase in housing and utility costs, which accounts for over 39% of consumer expenses. The biggest emirate in the UAE, Abu Dhabi, hiked electricity and water tariffs in January which contributed to the rise in inflation. In addition, food and soft drink prices rose 3.4% on an annual basis and 1.4% on the month.
Over the coming month there will be a lack of notable economic data pertaining to the United Arab Emirates, which is not unusual. The nearest publication will be Augusts’ inflation data, due for publication on September 21
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, which is forecast to rise to 4.46%. Given the lack of domestic data to provoke changes, the Dirham will be subject to shifts in market sentiment and oil prices. With many analysts predicting that market sentiment will remain damp for some time to come amid fears surrounding China’s ailing economic growth and crude oil prices showing little sign of rising in the near-term, the Dirham is very likely to continue trending lower versus its major rivals.