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The storms of war are louring over the UK economy
Having spent most of March gaining on the euro, sterling reversed direction on Friday and lost most of a cent within a few hours. Will that continue this morning or was it simply a correction? The worry for those buying euros is that having failed to break through a resistance level for the past few months it will now crash downwards as the threats to the UK economy and political stability in the UK mount over the coming couple of months.
GBP/USD has shown little clear direction for the past fortnight, but it’s another week where the big driver will be war in the Middle East – in particular whether oil can get through the Strait of Hormuz or whether the war will be stepped up with ‘boots on the ground’. Over the weekend, the rhetoric between Washington and Tehran sharpened again, with fresh threats around shipping and energy infrastructure. When traders can’t be sure oil will flow smoothly, they tend to price in “just in case” risk everywhere.
Central banks are already boxed in between slower growth and rising inflation. The Bank of England (BoE) held rates last week on the risk that higher energy costs push inflation back up. The European Central Bank (ECB) and US Federal Reserve did the same, warning that the war is muddying the outlook for both prices and growth.
The UK data backdrop isn’t exactly giving anyone comfort, with growth at 0% according to the Office for National Statistics (ONS) last week and government borrowing costs rising. There are some important data points this week, starting tomorrow with the Purchasing Managers Index (PMI). These are “flash” surveys of business leaders for the UK, eurozone and the US and will be viewed as an early warning of an impending recession if they turn negative.
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GBP: Pound faces uphill battle
Sterling fell sharply on Friday against the euro, but will that continue today? The prompt seems to have been a general loss of faith in UK finances, as government borrowing costs rise and the economy remains stuck amidst sticky inflation. We’ll see how the inflation picture is looking on Wednesday, but before that the BoE’s chief economist Huw Pill will be speaking tomorrow. The PMI numbers will also be of great interest tomorrow. It could be a tricky week for sterling.
GBP/USD past year
EUR: Gains on major pairs as rate rises threaten
The euro’s tone is still being pulled in two directions. On the one hand, the European Central Bank (ECB) is signalling it can’t relax yet, because higher energy prices can feed through into broader inflation. On the other, the same shock can dent growth, especially for energy-hungry industry. Given its current very low inflation, the ECB has more wiggle room to increase rates, possibly a reason why the euro gained on both the pound and US dollar going to the weekend. It’s a relatively heavy data week, starting with PMI tomorrow and inflation later.
GBP/EUR past year
USD: Safe-haven, with a question mark
The dollar still tends to benefit when the world feels uncertain, even when the US is a central character in the story. If markets start thinking the conflict could broaden, you can get a tug-of-war between safe-haven demand and worries about inflation being pushed higher again via fuel and shipping costs. Tomorrow’s US flash PMI is one of the key diary items, but the bigger swing factor is still headlines out of the Gulf. If the Hormuz situation looks like it’s stabilising, risk appetite usually improves quickly. If it doesn’t, the defensive mood can linger.
USD/GBP past year
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