Despite the negative political mood music and handwringing over the UK’s defence embarrassments, on the economic front the pound has been in recovery. It has gained close to 1% on the euro over the past week, to its best since mid-February. Although it has lost a similar amount to the US dollar, that’s generally to be expected when a conflict this large and impactful on oil supplies hits the headlines.
The markets were able to snooze through the Chancellor’s Spring Statement this week, while memories of last Friday’s Gorton and Denton byelection embarrassment for the government have faded, for now, as the government has regained the initiative on such issues as immigration.
We’ve just heard that house prices continue to rise. The Halifax House Price Index gained 0.3% last month, taking the annual rise to 1.3% and suggesting, said a Halifax spokesperson, that the market is gaining momentum as interest rates have fallen.
The currency markets, however, are still trading the same big theme: conflict risk, energy prices and what that does to inflation. With no-one quite knowing the war aims, some talk of back-channel diplomacy appears to have taken the edge off the panic, and investors have been less eager to pile into “safe” trades at any price.
However, the risks to large oil-producing infrastructure within range of Iranian missiles remain significant, and oil prices have been the most influential factor this week. When the price of crude jumps, it feeds straight into household bills, business costs and shipping. And that, in turn, drags central banks back into the spotlight. A world that was talking about rate cuts suddenly has to keep one eye on price pressures again.
In the UK, the politics of all this are messy. The government is being pushed on how it would protect households if energy costs stay high. And markets are also watching whether investors remain comfortable funding UK borrowing. Yesterday’s gilt auction was well covered, but it doesn’t remove the bigger question: what happens if inflation risks get worse just as growth stays soft.
The next big swing factor is the US jobs report due later today. After a week dominated by geopolitics, payrolls could still set the mood for rates, and therefore for the dollar. In this market, one solid data point can move everything. One soft one can do the same.
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