The pound has slipped against a firmer dollar this morning and is holding its ground against the euro, but its day really starts at noon. That is when the Bank of England makes its biggest call of the summer, and it does so with oil back on the boil and the world’s central banks fast running out of easy answers.
The Federal Reserve went first. Overnight it left American interest rates untouched, yet three of its policymakers broke ranks and voted to raise them there and then. Rates did not budge, but a 9-3 split is about the loudest way a committee can tell you the argument over inflation is nowhere near settled.
Then there is oil. Brent crude jumped by nearly 8 per cent on Wednesday as the Middle East ceasefire fell apart, with Iran hitting US forces and Washington striking back overnight. For a Bank of England trying to work out whether inflation is truly beaten, the timing could hardly be worse.
All of which leaves Andrew Bailey and his colleagues with an awkward tale to tell. June’s slowdown in inflation to 2.6 per cent was real progress, the lowest reading in more than a year, but a fresh oil surge could quietly undo it. That is why the Bank is widely tipped to sit on its hands rather than gamble on a move in either direction.
A hold is the firm favourite, so the decision itself may be the dullest part of the day. The interest is in the vote, the Bank’s new forecasts and what Bailey says at his lunchtime press conference. A bigger push for higher rates could lift the pound; a calm, united hold and sterling may be left waiting for its next cue.
Even then the day is far from over. There is eurozone growth data, German inflation and a busy run of US releases still to come this afternoon, and any of them could give exchange rates a nudge. The thread running through the lot is one simple question: how long can central banks keep waiting while oil keeps forcing their hand?
GBP: The split does the talking
Sterling is softer against the dollar and holding firm against the euro as it waits for the noon announcement. A hold is all but nailed on, so the real interest is whether the two policymakers who backed higher rates in June have picked up any company. A bigger rebellion would hint that worries about inflation are spreading and could give the pound a lift, while another 7-2 hold would leave it leaning on Bailey's tone for direction.
GBP/USD: the past year
EUR: Data has to deliver
The euro is a shade weaker against the dollar this morning and broadly steady against the pound. The European Central Bank held rates last week but pointedly left the door open to one more rise, and today's growth and German inflation figures will show whether that is realistic. Decent numbers would keep another hike in play and support the euro; a weak set would leave it exposed, especially with pricier oil already threatening businesses across the region.
GBP/EUR: the past year
USD: Three broke ranks
The Federal Reserve kept US rates on hold overnight, but the story was the three officials who wanted them higher straight away. Curiously the dollar dipped at first even as long-term borrowing costs jumped, before firming again as the fresh strikes on Iran sent nervous money its way. This afternoon's growth, inflation and spending figures are the next test, and a strong set would hand those three dissenters a louder voice.
USD/GBP: the past year
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