The pound has drifted into the back half of the week, a little softer against a strong dollar and barely moving against the euro. That stillness is deceptive. The real story this week is not where the currencies are sitting but what is about to happen to them.
Three big interest rate decisions are now stacked into the next eight days. The European Central Bank (ECB) goes first, on Wednesday. The US Federal Reserve follows in the middle of next week, and the Bank of England rounds things off the day after. What makes this interesting is that they look set to walk in different directions.
The European Central Bank is the one preparing to move. Eurozone inflation crept higher again in May and, more tellingly, the underlying measure that strips out food and energy picked up too. Prices are no longer just rising at the petrol pump. So the bank looks ready to raise rates next week, which is a curious thing to do just as the eurozone economy is visibly losing pace.
Then there is oil, which had been driving everything and has quietly changed its tune. Having spent weeks near the top of the range, the price slipped back overnight, taking a little heat out of the inflation worry that has gripped every central bank since the spring. Nobody is relaxing. A ceasefire between the United States and Iran is agreed in principle but still unsigned – and there were fresh confrontations in the Gulf overnight. But for now the energy panic has eased a notch.
The dollar, by contrast, is being carried along by an American economy that simply refuses to slow down. Hiring stayed strong in May, business surveys came in punchy and inflation is still running hot. Markets have given up entirely on the idea of US rate cuts this year and have started to wonder, quietly, about a rise instead. Friday’s monthly jobs figures will tell us whether that hunch has legs.
That leaves the Bank of England in the most awkward spot of the three. It is caught between an inflation problem it cannot ignore and an economy that is starting to wobble, and it has the luxury of going last. The next eight days will decide which of these stories has staying power. Until then the pound is left waiting on other people’s decisions, which is rarely a comfortable place for a currency to be.
GBP: Squeezed from both sides
The pound's trouble is that its two big problems pull in opposite directions. Inflation is sticky enough to argue for higher rates, yet the jobs market is softening and the economy is losing momentum, which argues for patience. Add a political risk premium, with long-term government borrowing costs at their highest since the 1990s as questions swirl around the prime minister, and the Bank of England's job on the 18th looks thankless.
GBP/USD: the past year
EUR: Hiking into a slowdown
Here is the puzzle: a central bank about to raise rates would normally mean a firmer currency, yet the euro has been soft. The move has been so heavily trailed that there is little surprise left in it, and a stronger dollar has done the rest. What matters now is the tone Christine Lagarde strikes afterwards, and whether the bank is reaching for a one-off insurance hike or signalling a longer campaign.
GBP/EUR: the past year
USD: Too strong to cut
The dollar's strength comes down to an economy that keeps confounding the doubters, with hiring, factories and the services sector all holding up better than expected. That has left the new Federal Reserve chair Kevin Warsh in an uncomfortable position, installed by a president who wants lower rates but handed an inflation rate too high to allow them. Friday's payrolls report is the next clue, and a strong number would only harden the view that cuts are off the table for now.
USD/GBP: the past year
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