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War in the Middle Eastern deserts has made little impression on sterling
Despite the negative political mood music and handwringing over the UK’s defence embarrassments, on the economic front the pound has been in recovery. It has gained close to 1% on the euro over the past week, to its best since mid-February. Although it has lost a similar amount to the US dollar, that’s generally to be expected when a conflict this large and impactful on oil supplies hits the headlines.
The markets were able to snooze through the Chancellor’s Spring Statement this week, while memories of last Friday’s Gorton and Denton byelection embarrassment for the government have faded, for now, as the government has regained the initiative on such issues as immigration.
So the markets are still trading the same big theme: conflict risk, energy prices and what that does to inflation. With no-one quite knowing the war aims, some talk of back-channel diplomacy appears to have taken the edge off the panic, and investors have been less eager to pile into “safe” trades at any price.
However, the risks to large oil-producing infrastructure within range of Iranian missiles remain significant, and oil prices have been the most influential factor this week. When the price of crude jumps, it feeds straight into household bills, business costs and shipping. And that, in turn, drags central banks back into the spotlight. A world that was talking about rate cuts suddenly has to keep one eye on price pressures again.
In the UK, the politics of all this are messy. The government is being pushed on how it would protect households if energy costs stay high. And markets are also watching whether investors remain comfortable funding UK borrowing. Yesterday’s gilt auction was well covered, but it doesn’t remove the bigger question: what happens if inflation risks get worse just as growth stays soft.
The next big swing factor is the US jobs report due later today. After a week dominated by geopolitics, payrolls could still set the mood for rates, and therefore for the dollar. In this market, one solid data point can move everything. One soft one can do the same.
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GBP: Pound on upswing
Sterling gained some ground yesterday, recovering to its best against the euro for close to a month – well before the new Iran war began – as bond yields and stock markets held firm. Following a better than expected Halifax house price index this morning, the next event on the data calendar will be retail sales from the British Retail Consortium on Tuesday.
GBP/USD past year
EUR: Markets listen out for ECB hints
The euro has been the biggest currency loser from the Iran war so far, with European economies especially affected by rising oil prices. European Central Bank president Christine Lagarde will be talking today, as have other ECB interest rate setters, and the markets will be listening out for any hints on how all this will affect ECB policymaking.
GBP/EUR past year
USD: Jobs day will be a break from war worries
It’s Non-Farm Payrolls day in the USA. Following a better-than-expected result last month, a severe reduction in the number of new jobs is expected this afternoon. NFP does tend to carry surprises though. Next week we’ll get the inflation reading, but events in the Middle East continue to put America’s domestic news somewhat on the back burner.
USD/GBP past year
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