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The pound has slipped further against the dollar this morning after Iran publicly rejected Washington’s 15-point peace plan, calling it “maximalist” and “unreasonable”. Oil prices jumped straight back above $100 a barrel on the news, wiping out the brief relief rally that had lifted markets yesterday when talk of negotiations first emerged.
That whipsaw tells you everything about where we are right now. One headline about peace talks knocks a few dollars off the oil price; one rejection puts them straight back on. For businesses trying to plan around exchange rates, shipping costs and energy bills, it is an almost impossible environment. Sterling has drifted lower against the dollar for the third consecutive session, though it is holding relatively steady against the euro, where the energy pain is arguably even worse.
Yesterday’s UK inflation figures from the Office for National Statistics (ONS) showed headline consumer prices index (CPI) inflation unchanged at 3%, with core inflation nudging up to 3.2%. In normal times, that would be the day’s main story. But these figures were collected in February, before the conflict escalated, so markets treated them as old news almost immediately. The real test comes next month, when the first post-war price data arrives.
In Germany, the Ifo Business Climate index fell to 86.4 in March. The headline number just about beat expectations, but the detail was ugly: business expectations plunged to 86.0, their lowest in over a year, with the institute’s president saying the war has ended hopes of an economic upswing for the time being. That matters for sterling-euro, because a weakening eurozone tends to support the pound against the single currency, even when the UK has its own problems.
The broader picture hasn’t changed. Central banks on both sides of the Atlantic and the Channel are stuck. The Bank of England held rates unanimously at its last meeting and markets are now pricing in the possibility of a rate increase rather than a cut this year. The European Central Bank’s president has opened the door to hikes if inflation deviates significantly from target. The Federal Reserve held steady too, with officials warning that energy-driven inflation could keep rates higher for longer.
Oil remains the axis everything else turns around. Iran says “non-hostile” ships can transit the Strait of Hormuz with prior coordination, but that is a long way from normal shipping. The strait carries roughly a fifth of the world’s seaborne oil, and with it effectively restricted since early March, the disruption is already feeding through to fuel prices, delivery times and factory costs. The purchasing managers’ index (PMI) data earlier this week showed UK manufacturing input costs rising at their fastest pace since 1992.
For the rest of this week, the focus shifts to Friday’s UK retail sales and consumer confidence data, which will give an early read on how households are responding to the squeeze. In the US, the final estimate of fourth-quarter gross domestic product (GDP) is also due. But frankly, all of those releases will be overshadowed if there is any shift — positive or negative — in the diplomatic standoff.
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GBP: Caught between old data and new reality
Sterling edged lower again against the dollar this morning, weighed down by safe-haven flows and the unresolved energy shock. Yesterday’s CPI reading of 3% looked reassuringly stable, but with the Bank of England itself forecasting inflation could hit 3.5% by the summer — and that was before the latest oil spike — the pound’s rate outlook remains deeply uncertain. Friday’s retail sales and GfK consumer confidence figures will offer the first real glimpse of how consumers are coping.
GBP/USD past year
EUR: Ifo gloom caps the single currency
The euro is struggling to find its footing after the German Ifo survey showed business expectations dropping sharply in March, dragged down by the energy shock hitting manufacturing and construction hardest. The European Central Bank’s hawkish shift on inflation has given the single currency some rate support, but that is being outweighed by growing fears about what elevated oil prices mean for the eurozone’s already modest growth. Next Tuesday’s eurozone flash CPI for March will be the first inflation reading to fully reflect the energy shock, and it could be a market-mover.
GBP/EUR past year
USD: Diplomatic failure reinforces safe-haven bid
The dollar strengthened broadly this morning after Iran’s rejection of peace talks removed any near-term hope of a resolution to the Strait of Hormuz crisis. The Federal Reserve’s reluctance to cut rates — with officials explicitly warning about energy-driven inflation — continues to provide a floor under the currency. Tomorrow’s final fourth-quarter GDP estimate, expected to confirm growth slowed sharply to around 0.7%, and the University of Michigan consumer sentiment reading will give markets something to chew on, but the geopolitical headlines remain firmly in charge.
USD/GBP past year
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