Dollar rises even as oil falls

The pound is the weakest of the major currencies this week, and while a rampant dollar is part of the story, the more telling part is closer to home. Sterling has slipped to its weakest in more than two months and given ground to the euro as well. A strong dollar would have nudged it lower whatever happened. What has left it with nowhere to hide is a run of trouble that is entirely its own.

Start with the backdrop. The US Federal Reserve, under its new head Kevin Warsh, used his first meeting in the chair to clear its throat and change the subject, stripping out the old hints at rate cuts and nudging its forecasts towards a rise later this year. The dollar shot to a one-year high. When it moves like that, every other currency tends to do as it is told, and the pound was no exception.

There is a twist, though, because the thing that had been propping the dollar up is quietly fading. Brent crude has slumped to around its lowest since early March now that the United States and Iran have signed a deal to reopen the Strait of Hormuz, with the ink going on in Geneva, and cheaper energy means calmer inflation the world over. The dollar has not so much lost its support as swapped it, trading the flight to safety for the promise of higher interest rates. The reopening, for now, is a trickle rather than a flood, and the deal is a framework rather than a settled peace.

Now to the pound’s own problems, which are stacking up. The Bank of England held rates again, by seven votes to two, with two members itching to raise them while governor Andrew Bailey kept his nerve and his caution. The economy shrank a touch in April and inflation has gone sideways rather than up, so the argument for a British rate rise has quietly lost its heat. That leaves sterling leaning on a move later in the year that the Bank seems in no hurry to make.

And then the politics turned. Andy Burnham has won the Makerfield by-election with room to spare, a sharper result than the polls had priced, and it hands him exactly what he wanted, a seat in Parliament and a clear run at the Labour leadership. A sitting prime minister now faces a credible challenger from his own benches, with the reported numbers to mount one, and questions about Keir Starmer’s grip will only grow louder from here. Markets dislike that sort of uncertainty at the best of times, and these are not the best of times for the pound.

So the week ends with sterling squeezed from outside by the dollar and unsettled from within by its own politics. The next clues come from a clutch of business activity surveys and the Fed’s favourite inflation gauge in the days ahead. But the louder question is a domestic one, whether the noise around the prime minister fades or builds into something markets decide they have to take seriously.