Pound waits as the dollar surges

The pound is having a rougher morning than the euro and a much rougher one than the dollar. It is soft across the board and weakest of all against the dollar, after its sharpest fall in months. The reason landed overnight in Washington and the next chapter arrives at lunchtime in London.

Late last night Kevin Warsh chaired his first meeting as head of the Federal Reserve and he wasted no time setting a tone. Rates were left where they are, as everyone expected. But the gentle hints at cuts to come were stripped out and the Fed’s own forecasts now point to a possible rate rise later this year rather than a cut. Markets did a double take.

The dollar climbed hard, its best day in three months, as traders rushed to catch up with the tougher line. American borrowing costs rose, tech shares on Wall Street slipped and gold eased back. A central bank that had spent months inching towards cutting rates is suddenly hinting at the opposite, and that is the sort of turn that moves money fast.

There is a catch, though, and it is bobbing about in the oil market. Brent crude is sitting near a three-month low, with a deal between the United States and Iran to reopen the Strait of Hormuz due to be signed in Geneva on Friday. Cheaper energy feeds straight through to lower inflation, which is a relief for every central bank that spent the spring fretting about prices. The inflation scare that had been propping up the dollar as a safe haven is quietly fading.

Closer to home the pound has troubles of its own. Inflation came in cooler than expected this week, holding steady when many had pencilled in a small rise, and figures yesterday showed the economy shrank a touch in April. Together they have taken the heat out of any talk of a British rate rise. Now it is the Bank of England’s turn, with a decision due at midday, and the real interest is in how the rate-setters split and whether governor Andrew Bailey sounds any more rattled by prices than he did last month.

There is politics in the mix too. Voters in Makerfield head to the polls today in a by-election that could send Andy Burnham back to Westminster, with the result expected in the small hours of Friday and a fresh round of questions about the prime minister’s grip likely to follow. So the week builds to a busy finish. With the Fed’s hand now shown, the Bank about to play its own and a deal to reopen Hormuz due within days, the next few days will decide whether the pound’s recent calm holds or starts to crack.