Markets are still trading the same story, but the mood shifted overnight. Reports that Iranian operatives have indirectly approached the CIA to discuss terms for ending the conflict gave investors a reason to exhale – and the dollar, which had surged roughly 2% earlier in the week, gave back a fraction of those gains.
That doesn’t mean the crisis is winding down. The conflict is now in its sixth day, with no formal ceasefire talks under way and contradictory signals from all sides. But even the hint of a diplomatic offramp was enough to take the edge off oil prices, which have pulled back from their midweek highs and are now holding in the low $80s per barrel.
The bigger question is what happens next to inflation expectations. Even at current levels, Brent crude is sitting well above where it was a fortnight ago. That feeds into shipping costs, energy bills and business overheads – and central banks on both sides of the Atlantic are watching closely.
In the UK, the fallout from Rachel Reeves’ spring statement is deepening. Think tanks including the Resolution Foundation have already declared the Office for Budget Responsibility’s (OBR) forecasts “out of date” – arguing that sustained energy price rises could add over £500 to typical household bills and roughly a percentage point to inflation. Today’s £3.5 billion gilt auction will be an early test of whether markets are willing to fund UK borrowing in this environment.
Sterling has actually recovered a touch this morning, clawing back some of its sharp losses from earlier in the week as the dollar eased. The pound is also marginally firmer against the euro. But make no mistake – this is a bounce driven by a softer dollar, not by any improvement in UK fundamentals.
The euro, meanwhile, remains caught in its own bind. Inflation in the bloc ticked up unexpectedly last month, and with energy costs surging, the European Central Bank’s path back to rate cuts has got a lot murkier. And in the US, a surprisingly strong services survey yesterday reminded markets that the world’s largest economy isn’t slowing down in the way some had expected – complicating the Federal Reserve’s own calculations.
All eyes now turn to tomorrow’s US jobs report, with the conflict remaining the dominant force across currencies in the meantime.
