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The two-week Middle East ceasefire prompted a frantic rally in currency markets yesterday.
Currency markets begin Thursday on the back foot after cracks appeared in the two-week Middle East ceasefire less than 24 hours after it was announced. The US dollar recovered some of Wednesday’s losses, gaining close to a cent over the pound and euro.
Sterling had strengthened to its highest level in a month against the US dollar and its best in a week against the euro alongside a ferocious ‘relief rally’ prompted by the ceasefire. Stocks surged and the price of oil cratered by almost 20%, but a lack of clarity around next steps means this very much remains a live situation.
President Trump did stress this was a ‘two-sided’ ceasefire, one that was contingent upon Iran reopening the Strait of Hormuz. In a press conference yesterday, government officials indicated they also expected Iran to give up its enriched uranium or face American boots on the ground. Meanwhile, Iran insisted that Lebanon must be included in the ceasefire terms, closing the Strait of Hormuz as Israel launched a punishing wave of strikes.
Prices and demand for homes fell in the UK as the oil crisis and the uncertain interest rate path dampened demand in March. Halifax’s monthly report found house prices rose at an annualised 1.3% last month, below consensus economic forecasts.
Britain’s construction industry has certainly been feeling the impact. Output came in below the neutral 50 mark for the fifteenth consecutive month in March, fuelled largely by very modest activity in house building.
The International Monetary Fund (IMF) warned that defence investment alone rarely accounts for significant GDP growth. In what will be a worrying report for countries like Germany, which has staked much on its ability to drive output by investing in the military and infrastructure, IMF analysts argued that fiscal injections more commonly lead to inflationary spikes.
There’s a lot going on right now. From war to deep uncertainty over the interest rate outlook, many factors could impact exchange rates between now and the summer. Remember to grab your copy of our latest Quarterly Forecast when it is released later today. You’ll find in depth analysis of all the key themes, as well as what all that means in real terms.
Make sure any upcoming transactions are protected against the risks of sudden market movements. Secure a fixed exchange rate now with a forward contract; call your account manager on 020 3918 7255 to get started.
GBP: Hope returns
Wednesday reversed quite a long streak of poor returns for sterling. The pound strengthened by almost two cents against the US dollar as part of a broad dollar weakness. At the same time, government borrowing costs fell as traders bet the economic pain from the Middle East conflict would be less than feared.
GBP/USD: the past year
EUR: Healthy trade surplus
Germany’s trade surplus narrowed slightly to €19.8bn in February. The figures surprised to the upside after January’s slow trade data, with exports and imports surging by 3.6% and 4.5% respectively month-on-month.
GBP/EUR: the past year
USD: Fed open to hikes
Also supporting the US dollar was an indication from the Federal Reserve that it was increasingly open to interest rate hikes. In keeping with many other central banks, the Fed seems to be closely monitoring the impact of the war in the Middle East, standing ready to intervene to halt inflation.
EUR/USD: the past year
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