Pound climbs as growth returns

The pound is having a good week, and it is not often you get to write that without a caveat arriving in the same sentence. It has climbed to its strongest against the US dollar since the middle of June and sits close to a one-year high against the euro. Better still, for once sterling is not simply leaning on someone else’s bad luck. It has actually done a bit of the work itself.

The homegrown help turned up this morning. The economy grew by 0.1% in May, which is exactly what forecasters had ordered and just enough to shuffle growth back onto the scoreboard after April’s small stumble. Nobody is throwing a party over 0.1%, and services did all the lifting while factories and building sites quietly went the other way. But after a jittery spring, the pound was in no mood to be fussy about where a bit of good news came from.

The bigger shove came from across the Atlantic. For the second day running American inflation turned out softer than anyone had braced for. Tuesday delivered the news that consumer prices had actually slipped over the month; on Wednesday came word that the prices American producers charge had fallen too, the first time that had happened since last summer. Two gentle readings back to back were enough to cool the betting on another US rate rise, and a cooler outlook duly took the swagger out of the dollar.

There is a catch, of course, and it is bobbing about in the Gulf. Most of that cheering drop in prices, on both sides of the Atlantic, came down to one thing: cheaper energy. Which is awkward, because oil has started creeping higher again as the quarrel between the United States and Iran flares back up around the Strait of Hormuz, the narrow channel a hefty slice of the world’s oil has to squeeze through. Fresh American strikes overnight and a renewed blockade near Iran’s ports have nudged crude up for a third day running. If cheap energy is what dragged inflation down, dear energy is exactly what could haul it back up.

So the world’s big central banks are all squinting at the same two-handed story. Cheaper energy makes leaving interest rates alone the easy call; a climbing oil price makes that same call look like tempting fate. The European Central Bank meets next week and the Federal Reserve and the Bank of England the week after, and every one of them is chewing on the same question. Is this run of calmer inflation the genuine article, or just the quiet bit before the next bang?

For now, though, the pound is enjoying its spot in the sun and not asking too many questions. Whether it gets to stay there depends less on anything happening in Westminster than on a shipping lane several thousand miles away, and on whether this week’s run of softer inflation figures can survive an oil price that has other ideas.