Sterling caught in the crossfire

The pound finds itself pulled in three directions this morning, with the Office for National Statistics (ONS) first-quarter gross domestic product (GDP) release landing on the same day Wes Streeting is expected to resign as Health Secretary and mount a formal challenge to the prime minister. Yesterday’s hot US inflation print has only added to the strain, leaving sterling weaker against the dollar but holding its ground against the euro.

The first-quarter print delivered a clean beat. The economy grew by 0.6% in the three months to March, three times the pace seen at the end of last year, with all three sectors contributing and services leading the way at 0.8%. The fourth-quarter figure was also revised up from 0.1% to 0.2%, giving Chancellor Rachel Reeves a rare piece of good news to point to. The pound has nudged higher on the data, although much of that strength predates the energy shock from the Middle East and the political turbulence that has rattled gilt markets all week.

The bigger story for the pound is whether Wes Streeting walks out of his department this morning and triggers the formal leadership contest that markets have been bracing for all week. The Times reported overnight that Streeting’s allies believe he has the 81 nominations needed; Number 10 disputes the maths. Either way, the threat hangs over every gilt auction and every cable trade today.

Across the Atlantic, the story is simpler and sharper. April’s US Consumer Price Index (CPI) came in at 3.8% on the year on Tuesday, the highest reading in nearly three years. Wednesday’s Producer Price Index (PPI) was worse still, jumping 1.4% on the month, with services prices rising 1.2%. That has effectively closed the door on Federal Reserve rate cuts this year. Markets are now pricing in a roughly one-in-three chance the Fed’s next move is a hike, not a cut.

The European Central Bank (ECB) is travelling in the same direction. Chief economist Philip Lane warned on Wednesday that the oil shock from the Iran war may require the bank to raise interest rates to stop higher fuel costs spilling into wages and broader prices. Bundesbank president Joachim Nagel went further the day before, telling Handelsblatt that hikes are “increasingly likely”. Money markets now price an 86% chance the ECB raises rates at its 11 June meeting and as many as three hikes by year-end.

Oil remains the engine driving all of this. Brent crude is hovering above $100 a barrel, with the Strait of Hormuz running at a fraction of its usual capacity and the International Energy Agency (IEA) warning the market could stay under-supplied until October. Donald Trump met Xi Jinping in Beijing yesterday for the first day of their summit, with trade dominating the agenda and a sharp warning from Xi over Taiwan. No formal deliverables emerged on day one.

The day still has plenty to give. US retail sales and weekly jobless claims land at 13:30 BST, with the Bank of England’s Huw Pill – the lone dissenter who voted for a rate hike at the last meeting – speaking later in the afternoon. Next Wednesday’s UK inflation figures will be the next major test for the pound.

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