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The oil story has moved on again. It’s no longer just about a higher price, but also about whether supply can flow safely, and how quickly governments can calm things down. Over the weekend, the UK discussed practical support to help keep shipping lanes open around the Strait of Hormuz, while the International Energy Agency pushed ahead with what it described as its biggest coordinated release of emergency oil stocks.
This all drops straight into the middle of the interest-rate debate. If energy stays expensive, inflation risks rise. But higher energy costs can also slow an economy down.
The UK has already had a clear reminder that growth was weak even before the latest energy shock properly took hold. On Friday, the Office for National Statistics said the economy recorded 0.0% ross Domestic Product (GDP) growth in January (flat on the month). Forecasters had been looking for around 0.2%. The same update also pointed to a softer patch in parts of the economy, including manufacturing.
So the Bank of England walks into this week with a problem. A rate cut would normally be easier to argue for when growth is flat. But if oil-driven inflation is rising at the same time, cutting rates becomes a tougher sell. The BoE decision on Thursday 19 March now matters more than it did a fortnight ago.
In the background, currencies have been moving in a fairly simple way: the dollar has tended to benefit when markets are nervous, while the euro has looked more sensitive to energy concerns. Sterling has been caught in the middle, steady at times against the euro but less comfortable against the dollar.
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GBP: Flat GDP makes the BoE’s job harder
Sterling has been pulled in two directions. On one hand, 0.0% GDP growth in January strengthens the case for lower interest rates. On the other, the jump in oil prices makes it harder for the Bank of England to sound relaxed about inflation when it makes its decision on Thursday. Before that, we have the UK’s unemployment and earnings data on Thursday too, but the markets may be primarily focused on the tone set by BoE rate setters.
GBP/USD past year
EUR: Economic mood comes into focus
The euro continued to weaken against the US dollar last week while holding off further big losses against other currencies, including the pound. Energy costs feed quickly into European politics and household budgets, and we will get a steer on how worried European (and especially German) businesses and households are with the ZEW Economic Sentiment Index tomorrow. The ECB will be watching for signs that higher energy costs start changing inflation expectations or wage behaviour.
GBP/EUR past year
USD: Dollar stays strong on oil fears
The US dollar gained between 1 and 3% against other global currencies last week, including around 1.5% against the pound and euro. The biggest data event of the week looks to be Producer Price Inflation (PPI) on Wednesday, although this will be from before the oil price rise. Perhaps of more importance will be headlines on shipping security, the impact of emergency oil stock releases and any sign of peace and energy security returning.
USD/GBP past year
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