020 7898 0500
Sterling has spent the week holding its ground, firm against the euro and steady against the dollar, and on a morning like this that is the surprising part. When the pound sits still while everything around it lurches, it usually means the market is looking past it at something larger. Right now that something is a narrow stretch of water in the Gulf, and the news from it overnight was not good.
The truce that had quietly let oil fall and let central banks hope has fallen apart. Overnight the United States struck Iran again and Donald Trump promised more to follow, while Iran’s military declared the Strait of Hormuz closed to all shipping, warning that any vessel that tries to pass will be fired on. Through that strait flows a fifth of the world’s oil, so the threat alone was enough to push crude higher and remind everyone how quickly the calm can end.
All of which makes the timing of yesterday’s American inflation figures slightly absurd. Prices rose at their fastest annual pace in three years, exactly the sort of number that should have sent the dollar climbing. But underneath the headline, once you set aside the energy doing all the damage, prices were calmer than expected. The dollar, braced for a fright, took the reassurance and eased instead.
The European Central Bank has no such luxury of waiting. At lunchtime it is all but certain to raise interest rates for the first time in almost three years, a quarter-point move aimed squarely at the inflation the Gulf keeps feeding. It is the strange position of a bank tightening into a weak economy, not because it wants to but because the alternative is to let energy prices write the story for it. Whether Christine Lagarde signals that more rises are coming is the part the euro is really waiting on.
Closer to home, the pound’s calm looks less like confidence than the quiet of a currency whose problems, for once, are smaller than the next one’s. With three of the big central banks reporting inside a week, starting in Frankfurt this afternoon, the question underneath that calm is whether sterling is genuinely steady or simply waiting, like everyone else, to see what the Gulf does next.
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: From cuts to hikes
The quieter story under sterling's steadiness is that the British rate debate has turned on its head. A month ago the market was waiting for the Bank of England to cut; now, with energy costs climbing, it is leaning the other way and betting on rises before the year is out. Friday's growth figures are the awkward counterweight, expected to show the economy shrank in April just as the argument for higher rates is hardening.
GBP/USD: the past year
EUR: Weakest on hike day
For all that a rate rise is all but booked, the euro goes into the decision as the weakest of the major currencies, which tells you how little the market trusts the move to change much. A quarter-point does little for an economy that has barely grown, and traders seem to have decided as much already. The danger now is the familiar one: when a move has been this well flagged, the day it arrives can land with a thud.
GBP/EUR: the past year
USD: Warsh inherits the storm
The dollar's shrug at yesterday's inflation scare left it oddly placed, with the headline screaming rate rise and the detail whispering patience. Today brings producer prices and the latest jobless numbers to push the argument along a little further. The bigger moment comes next week, when Kevin Warsh takes the chair at the Federal Reserve for the first time and finds an oil shock waiting on day one.
USD/GBP: the past year
For more on currencies and currency risk management strategies, please get in touch with your Smart Currency Business account manager on 020 3918 7255 or your Private Client account manager on 020 7898 0541.
