Oil Prices Surge as UK Growth Data Takes Centre Stage: Sterling Update

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US and Iran exchange fire on shipping targets, pushing oil prices higher once again

Oil prices have surged again after the US struck three Iranian crude oil tankers in retaliation for the IRGC firing ballistic missiles at two US warships. The renewed escalation pushed Brent crude oil to its highest level since the collapse of the peace accord in July.

Admiral Brad Cooper, head of Central Command, stated that the US intends to impose the highest economic cost on Iran. However, such action increases the risk of attacks on shipping in the Strait of Hormuz by the Iranian regime, as well as the potential for attacks on refining facilities across the Middle East.

Meanwhile, US envoys completed talks in Russia and Ukraine, but neither side appeared ready to agree a ceasefire and Ukrainian President Zelensky predicted another winter of war. The prospect of a prolonged conflict in the region could provide further support for oil prices as supply remains constrained.

REC reports labour market stabilisation following a multi‑year downturn, though Jaguar Land Rover concerns weigh

The REC/KPMG employment report released this morning was more positive than recent releases, suggesting the labour market is showing signs of recovery in permanent job placements, while temporary placements grew at their strongest rate in more than three years.

However, employment news has not been universally positive. Media reports continue to focus on discussions between the UK government and Jaguar Land Rover, which may reduce its workforce by up to 4,000 employees as it seeks to lower costs. JLR faces significant revenue pressures as demand remains subdued following the 2025 cyberattack, a misplaced advertising campaign and increasing competition from Chinese EV manufacturers.

This week’s focus is on UK monthly GDP, industrial production, index of services and construction output data. Could the combination of the World Cup and warm weather provide further support to activity, or will activity have been negatively affected? The former remains the greater risk in my view, which could offer sterling some modest support into the end of the week.

Following robust US payrolls data, what will the CPI figures indicate?

Last week’s strong US non‑farm payrolls data left financial markets with a dilemma. Other secondary indicators suggested the labour market remains weak, but the USD rallied following Friday’s employment report. Yields also moved higher, suggesting the US Treasury’s attempts to reduce yields at the longer end of the curve have so far proven unsuccessful.

The key release this week is August CPI inflation on Friday at 13:30 BST. Risks remain that the headline rate stays elevated at 3.4% y/y while the core rate falls back to 2.4%. If that happens, it could increase the dilemma facing US policymakers. The Federal Reserve would face a choice between raising interest rates in response to headline inflation and risking limited transmission into core or second round inflation effects, or leaving rates unchanged and risking its credibility that policy is behind the curve if secondary inflation effects materialise.

The USD remains under pressure, particularly against the JPY, with the currency pair finally adjusting to economic realities as the yen had become significantly undervalued relative to purchasing power parity measures.

AfD wins in Saxony‑Anhalt, German industrial production falls despite strong factory orders, ECB in focus this week

News over the weekend that AfD secured victory in Saxony‑Anhalt, winning 43.8% of the vote according to preliminary results, left the party short of an outright majority but potentially makes a rainbow coalition among the remaining parties extremely difficult. The result is likely to send shockwaves through the German political establishment, with the largest governing party polling just over 17% of the vote.

German industrial production data for July also disappointed this morning, falling 1.1% m/m despite the surge in factory orders recorded over the past three months. The weakness may prove temporary, but it is another warning sign that conditions in the German economy remain precarious, particularly given ongoing challenges within the automotive sector.

The ECB meets on Thursday and is expected to raise all official interest rates by 25 basis points. Greater interest may lie in officials’ assessment of the disconnect between headline and core CPI rates, and whether tariff‑related pressures and trade uncertainty risk weaker GDP outcomes towards year‑end. If the ECB signals support for further tightening, the euro could strengthen. However, risks remain skewed to the downside for growth, which could weigh on the currency over the medium to longer term, in my opinion.

AI backlash presents potential challenges for Canada, while Mexico focuses on CPI figures

Some Canadian municipalities are introducing moratoriums on data centres or vetoing proposed projects as public scepticism towards AI continues to grow. Prime Minister Mark Carney has been keen to encourage such investment as the economy contends with the impact of US tariffs.

Concerns about labour market weakness driven by AI appear overstated. Nonetheless, they may continue to form part of the negative narrative around AI promoted by unions, alongside concerns around noise, energy consumption and water usage. With limited Canadian data releases this week, attention may remain on the weaker Canadian August employment report released at the end of last week, which has checked recent gains in the CAD.

For the MXN, focus this week falls on the release of August CPI inflation data in the middle of the week. Could inflation record a further decline in both headline and core measures, or even see the two move in opposite directions? The balance of risks for Mexican interest rates remains tilted towards lower rates, something recent strength in the peso may have accentuated, in my opinion.

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