The pound edged higher against a softer dollar yesterday and is sitting close to its best against the euro in a year, but it is not really in charge of its own day. That job belongs to a stretch of water in the Gulf, and to whether Washington can deliver the deal it says is all but done.
Scott Bessent set it off. The US Treasury Secretary said yesterday that a deal to reopen the Strait of Hormuz could be agreed “today or tomorrow”, and Brent crude fell about 5 per cent. It dipped below $80 for the first time since mid-July, which tells you how much fear about one shipping lane had been built into the price.
Then there is Tehran. It denies being in direct talks with anyone, though it admits to technical discussions through Omani mediators about safe passage for ships. Secretary of State Marco Rubio split the difference, allowing that there had been progress but “not finality yet”, which is diplomatic code for nobody having signed anything.
For Britain the stakes come with numbers attached. EY’s economists reckon a strait reopened by the end of September leaves the UK growing about 0.8 per cent this year, against 0.5 per cent if it stays shut into 2027. That gap is the difference between a dull year and a painful one, with 2027 tipping into contraction and inflation heading back above 6 per cent.
Andrew Bailey at the Bank of England and Kevin Warsh at the US Federal Reserve will have noticed. Both held interest rates last week over the objections of three colleagues who wanted a rise, which is about the clearest way two committees can say the inflation argument is still running. A long stretch of cheaper energy would take the sting out of it; a deal that falls apart by the weekend would hand it straight back.
Even so, the day has plenty left in it. Services surveys for the eurozone and Britain arrive this morning, American hiring figures follow this afternoon and Friday brings the monthly US employment report. Job vacancies already came in light yesterday, which leaves one question running through the lot: cheaper energy or a cooling American jobs market?
GBP: Rate gap carries sterling
Sterling's strength against the euro says less about Britain thriving than about UK interest rates sitting well above the eurozone's. That gap is doing the heavy lifting, and it gets a nudge this morning when the services surveys land, after July's factory figures were revised down to a four-month low. Bailey's committee does not meet again until September, by which point the new chancellor's spending plans will matter rather more than any survey.
GBP/USD: the past year
EUR: Inflation blocks a rate cut
Eurozone inflation crept up in July, having eased the month before, with energy still about a tenth dearer than a year ago. So cheaper oil arrives in Frankfurt as a relief rather than a worry, which is why a European Central Bank rate cut is nowhere on the agenda. Notes from last month's meeting are published tomorrow and should show how comfortable Christine Lagarde's colleagues really are.
GBP/EUR: the past year
USD: Fed split meets cooling hiring
American job vacancies dropped to about 7.4 million in June, weaker than expected. That is an awkward footnote to three Federal Reserve officials voting for higher rates days earlier, especially with US factories posting their strongest month in more than four years. Warsh has stopped telling anyone what he plans to do about it, which is one way of buying time until Friday.
USD/GBP: the past year
For more on currencies and currency risk management strategies, please get in touch with your Smart Currency Business account manager on 020 3918 7255 or your Private Client account manager on 020 7898 0541.
