Tensions in the Middle East rose last night as Israel launched a strike on Iran. Initial market reaction saw oil jump, equity futures drop, and save havens like CHF, JPY, and USD gain across the board. Iran’s media outlets are attempting to downplay the attacks, reporting that there are no casualties, and its nuclear sites are undamaged. Senior Iranian officials are also suggesting that there are no plans for any immediate retaliation. As a result of this, some of the initial panic in markets is fading, causing some of the initial USD gains to ease as well.
Fed commentary overnight also continued to suggest that the Fed are prepared to wait before electing to cut interest rates. Neel Kashkari suggested that rates may well stay on hold all year, and Fed Bostic reiterated his view it wouldn’t be appropriate to cut rates until the end of the year.
*Daily move - against G10 rates at 7:30am, 19.04.24
** Indicative rates - interbank rates at 7:30am, 19.04.24
UK data this morning showed that retail sales stalled in March, and provides further evidence of a lacklustre recovering in the UK economy from its technical recession last year, as well as highlighting that the cost-of-living crisis is still lingering. Worth noting that GDP in February was marginally lower than January – from 0.2% to 0.1%. GBP is lower across the board as a result.
Tension in the Middle East seems likely to be the overriding factor in the markets, and Israel's attacks last night once again highlight the lure of USD as a safe haven. Add this to the outlook in US inflation and interest rates, and there seem to be plenty of arguments to suggest further gains on USD in the medium term.
With UK CPI now lower than US CPI for the first time since 2022, you can understand why Governor Bailey commented on Wednesday that the UK faces less inflation risk than the US. Since June last year US CPI has oscillated between 3% and 3.7% whilst UK CPI has dropped from 7.9% to 3.2%. If UK CPI continues to fall next month, as Governor Bailey expects it to and US CPI continues to be sticky then it seems hard to argue why you wouldn’t see GBPUSD lower in this environment.
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