By Ashley Finill
Sterling has had a positive week against the Euro, climbing to close to a 9-month high against the single currency. Much of this movement has been driven by the escalating conflict in the Middle East, which is pushing global oil prices sharply higher. As the war in Iran enters its third week this weekend, there are growing concerns over supply disruption, particularly after Iran warned it could close the Strait of Hormuz, a key route for global oil shipments. Oil prices have already risen above $100 a barrel and the G7 nations have even announced an unprecedented release of strategic reserves in an attempt to stabilise the market, although this has had little impact so far. For the UK, rising oil prices will likely feed through into higher fuel and energy costs in the coming weeks, adding further inflationary pressure.
Rate Cut Expectations Fade as Inflation Pressures Build
That pressure from higher inflation will make it more difficult for the Bank of England to begin cutting interest rates again as soon as previously expected. With the Bank’s next decision due on Thursday of next week, expectations for a rate cut this month have already started to fade and seemingly being priced into the currency markets. Earlier in the year the prospect of cuts weighed on Sterling, but with a hold now looking more likely, the Pound has gained well over a cent against the Euro since the conflict began. After the decision at midday on Thursday, a press conference will be held with Governor Andrew Bailey speaking about the decision and also their plans going forward, amidst this current crisis in the Middle East and the impact it could have on inflation and on further rate cuts going forward.
Sterling Falls Against the Dollar Amid Global Uncertainty
Over to GBPUSD and the Pound’s fortunes are quite the opposite against the US Dollar, with the Dollar traditionally acting as a safe haven currency for investors during times of global uncertainty, GBPUSD has been highly volatile over the past fortnight as investors have moved funds into the US Dollar, while tensions in the Middle East continue to escalate. Sterling had already been steadily losing ground against the Greenback since the end of January, falling by over two cents before the conflict in Iran broke out. Since then, the Pound has slipped a further two cents, and additional losses could follow if uncertainty continues.
Data Today
Adding to the uncertainty within the UK economy, this morning’s UK GDP figures have highlighted just how fragile the current economies state is. Data released by the ONS showed the UK economy showed zero growth in January, missing the 0.2% that had been expected. The UK economy has struggled to gain any real momentum for several months now and with inflationary pressures building again, due to the rising energy costs mentioned earlier, the outlook for Sterling could become increasingly uncertain. If growth continues to stall, while inflation rises, it leaves the Bank of England in a difficult position when it comes to interest rate decisions in the months ahead. There are also a few more releases to take note of before the weekend. At 9:30am the UK posts consumer inflation expectations, followed by EU industrial production at 10am. Into the afternoon, Canada releases its unemployment rate. Stateside, the US releases GDP at 12:30pm, which is expected to remain at the previous reading of 1.4%. At 2pm the US also releases Michigan Consumer Sentiment, and finally at 6pm the US publishes its monthly budget statement.