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Oil tankers remained anchored in the Strait of Hormuz after the United States and Iran failed to reach a peace deal.
The pound weakened by over half a cent against the euro and the US dollar on Tuesday as hopes of an imminent peace deal in the Middle East slipped away.
President Trump’s weekend claim that peace with Iran had been “largely negotiated” led to a burst of optimism after the bank holiday. The price of oil fell, stocks rose and risk-on assets rallied. However, the realisation that the desired diplomatic breakthrough had failed to materialise soon burst that balloon.
Members of the European Central Bank, the Federal Reserve and the Bank of Japan have indicated they would be open to hiking interest rates over recent days as the energy crisis wreaks havoc on the supply chain and spending forecasts. Those comments acted as yet another headwind on the pound.
Energy regulator Ofgem confirmed more pain was on the way for British consumers this morning. The energy price cap will increase by 13% from July, adding an additional £200 to the average household bill. With the ripples from the Middle East conflict still making their way through the energy supply chain, prices are likely to remain elevated through the winter period, where demand for energy usually peaks, analysts said.
Tuesday was a quiet day in terms of economic news, so attention shifted to politics, where a former Labour prime minister again stuck his oar in, presumably much to the annoyance of sitting MPs. Tony Blair warned Labour had “almost infinite capacity for self-delusion” and must abandon policies like net zero if it wanted to win the next election.
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GBP: Sterling swelters
Much like the entire UK, the pound felt the heat on a Tuesday that moved from cautious optimism to resignation in the space of a few short hours. The one positive was that the bond markets remained relatively calm, although that may well change should the conflict take another turn.GBP/USD: the past year
EUR: Setting the scene for rate hikes
The European Central Bank’s (ECB) Isabel Schnabel and Philip lane used a joint press conference to declare the central bank should raise interest rates at its June meeting. Every day that passes means the most benign outcome for the eurozone becomes less likely, Lane argued, raising the chance of policy action two weeks for now.GBP/EUR: the past year
USD: Hawks circle
The US dollar has been propped up by the belief that the Federal Reserve will be forced to hold interest rates higher for longer due to increased inflation expectations. That’s despite the expectation that incoming governor Kevin Warsh will push to cut rates at the first opportunity.USD/GBP: the past year
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