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Choked oil and gas supplies have cause stagflation fears among UK businesses.
The pound has quietly climbed to a three-week high against the dollar this morning and is sitting close to its best of the year against the euro. Yet this is less a story about sterling’s own strength than about a dollar that cannot find its feet.
That much became clear overnight. The Federal Reserve released the minutes of its June meeting, the first held under its new chair Kevin Warsh, and they showed policymakers worried about stubborn inflation and in no rush to cut interest rates. On paper that is the sort of message that should have lifted the dollar. Instead it drifted lower, still nursing last week’s disappointing American jobs figures.
The louder drama, though, is playing out in the Strait of Hormuz. Brent crude jumped to around $78 a barrel on Wednesday, its highest in weeks, after American forces struck Iran again and President Trump declared the fragile ceasefire over. The strikes carried on overnight and Tehran threatened to close the waterway altogether, the channel through which roughly a fifth of the world’s oil normally passes.
This is where the two stories meet. Just as central banks had begun to believe inflation was fading, a fresh jump in energy costs forces everyone to redo the maths. British government borrowing costs have already climbed to their highest since June, quietly tightening the room the next occupant of Downing Street will have to work with.
Closer to home, the contest to replace Keir Starmer formally opens today as the Labour Party begins taking nominations, and it is looking less like a race than a coronation for Andy Burnham after his last potential challenger stepped aside on Wednesday night. Markets tend to welcome that kind of certainty, and the question now is who he picks as chancellor to steady the books. Westminster’s other contest is rather less weighty: having forced his own by-election in Clacton, Nigel Farage now finds the main parties declining to stand against him, leaving the comedy candidate Count Binface as his most visible opponent.
So the week turns on a single question: is this oil flare a brief spike or the start of something stickier? The answer will decide whether a soft dollar and a fresh government can keep sterling comfortable, or whether the return of imported inflation drags the conversation back to higher rates. American jobless figures later today and a run of central bank meetings at month-end will begin to tell.
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GBP: Hike bets build
Markets now see roughly a coin-flip on the Bank of England raising interest rates at the end of the month, a striking shift for an economy that was debating cuts not long ago. The return of oil-driven inflation is the main culprit, landing awkwardly on top of already tight public finances. The Bank's decision on 30 July, alongside a fresh set of forecasts, will show how seriously it is taking the threat.
GBP/USD: the past year
EUR: Pressure eases in Frankfurt
Eurozone inflation slowed more than expected in June to its lowest since the winter, taking some of the heat off the European Central Bank as it weighs whether to keep raising rates. That leaves the euro firm enough against a weak dollar but on the back foot against a resurgent pound. Its policymakers meet on 23 July, when the case for another move will be tested against the softer price data.
GBP/EUR: the past year
USD: Less united than it looks
Beneath the headline worry about inflation, the June minutes revealed only a handful of Federal Reserve officials keen to raise rates again, softer than the central bank's own projections had implied. That gap helps explain why the dollar slipped rather than rallied on what first looked like firm talk. Fresh inflation figures on 14 July and the Fed's meeting at month-end will settle which signal carries more weight.
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.
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.
