If you woke up yesterday thinking the oil crisis might be about to calm down, this morning’s news will have been a cold shower. Iran has rejected the US peace plan outright, calling it unreasonable, and oil prices have shot straight back above $100 a barrel. The dollar has strengthened on the back of it, which means the pound is under pressure again.
It has been a dizzying week for anyone watching exchange rates. On Monday the pound dropped sharply against the dollar as oil surged. On Tuesday it bounced back when rumours of peace talks emerged. Now it is sliding again after those talks appear to have gone nowhere. Against the euro the pound is holding a bit steadier, mainly because the eurozone is dealing with the same energy headache – arguably an even worse one, given how much more European industry depends on Middle Eastern oil and gas.
Yesterday’s UK inflation numbers showed prices rising at 3% a year, unchanged from January. That sounds stable enough, but here’s the catch: those figures were collected in February, before the conflict really escalated. They do not yet reflect what has happened to petrol prices, heating bills and shipping costs since. The Bank of England thinks inflation could reach 3.5% by the summer, and some economists think it could go higher than that. For anyone planning a currency transfer in the coming months, this matters – inflation expectations directly affect interest rates, and interest rates move exchange rates.
In Germany, a closely watched business confidence survey dropped sharply this morning, with company bosses saying the war has effectively killed off any hopes of an economic recovery this year. That is bad news for Europe but, in a roundabout way, it has been supporting the pound against the euro, because a struggling eurozone tends to weigh on the single currency.
The big picture is that every central bank – the Bank of England, the European Central Bank, the US Federal Reserve – is stuck. They all want to support growth, but surging energy prices are pushing inflation up, which means they cannot cut interest rates. Some are even talking about raising them. Markets now expect the possibility of a rate increase in the UK this year, which would have seemed almost unthinkable a month ago.
The Strait of Hormuz, the narrow waterway through which roughly a fifth of the world’s oil travels by sea, has been effectively restricted since early March. Until that changes, oil prices will remain volatile, and so will currencies. This week’s purchasing managers’ index data showed that UK factory costs are rising at their fastest pace since 1992, which gives you a sense of how quickly the energy shock is feeding through.
Looking ahead, Friday brings UK retail sales figures and a consumer confidence reading, both of which will tell us how people are actually feeling about spending. But in truth, every data release this week will be secondary to whatever happens on the diplomatic front.
