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The Straits of Hormuz (Below the Sky / Shutterstock.com)
Sterling hit a four-week high against the euro on Friday and despite a small dip so far this morning it remains strong, close to its best since last July. It is struggling against the US dollar, Canadian dollar and Japanese yen, but the events of the past week have boosted sterling against the Swiss franc and Australian dollar.
The big story at the start of this week is oil. Markets have spent the weekend staring at the same map: the Strait of Hormuz. When that waterway looks dicey for oil shipments, everything else suddenly feels fragile. The oil price has jumped again, moving above $100 this morning.
This is already feeding into transport, shipping and supply-chain prices, with businesses feeling it first and passing those costs onto households. For central banks, inflation had been calming down and rate-cut hopes were alive. In the US on Friday, Non-Farm Payrolls were well under expectations and unemployment rose in February, while retail sales dipped. But if an interest rate cut might help sort all that out, now energy prices are forcing everyone to do the maths again. March’s expected interest rate cut from the Bank of England now looks unlikely to happen, while markets are now pricing in an interest rate increase from the European Central Bank this year.
So Monday morning starts with a simple question: is this a short, nasty spike… or the start of a more stubborn inflation pulse? That answer will shape the mood for the week ahead, with US inflation data midweek likely to be the next big market test.
On the political side, the crisis appears to have strengthened the prime minister’s position, with his stand against Donald Trump drawing support from his MPs. Although higher prices and all the negative impacts from that will be unpopular in the country, it seems likely that leadership challenges are now on the backburner.
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GBP: A firmer pound against euro
Sterling has started the week on a steadier footing against the euro, but the pound’s problem is that higher energy costs land awkwardly on top of a stretched cost-of-living backdrop and tight fiscal headroom. If oil stays elevated, the conversation shifts from “when do we cut rates?” to “how sticky does inflation get?”.
GBP/USD past year
EUR: Europe’s energy bill is back in focus
The euro’s mood is being set by the same old vulnerability: energy imports. When oil and gas jump, Europe pays quickly and visibly. That’s why the single currency can struggle even when the dollar isn’t roaring. Eurozone inflation had already surprised on the upside before the latest escalation really hit energy markets. That makes the European Central Bank’s job messier, because rate-cut optimism gets harder to defend when the inflation numbers stop moving in the right direction.
GBP/EUR past year
USD: Safe-haven demand meets an inflation headache
The dollar benefits when investors get nervous, but higher energy prices have seriously complicated the Fed’s path to interest rate cuts. Right now, the dollar is trading like a barometer for fear and for rate expectations at the same time. That can create choppy moves and sudden reversals. The next clue will come from the data flow this week, especially US inflation, and whether oil headlines keep worsening or finally cool.
USD/GBP past year
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