British Pound Dips as Hawkish Fed Bets and High Oil Prices Bolster Dollar

The British pound edged lower against the U.S. dollar on Monday, as elevated oil prices and persistent expectations of a more hawkish Federal Reserve continued to underpin the U.S. currency.

Market Snapshot

In early European trading, the GBP/USD pair was down 0.07% to trade at $1.3385, according to market data from 05:22 ET (09:22 GMT). The euro also eased, with the EUR/USD pair falling 0.06% to $1.1479.

The dollar's resilience comes after it lost some ground on Friday following a reported rate check by the Bank of Japan. However, analysts note the greenback remains on a solid footing.

Fed Policy and Oil in Focus

With a light economic data calendar, market drivers are centered on central bank expectations and energy costs. According to Francesco Pesole, an FX strategist at ING, the potential for markets to price in a more aggressive Federal Reserve is a "key argument for further US dollar gains."

ING's analysis highlights several key points:

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• The firm now expects one final Fed rate hike this year, with December being more likely than October.
• Markets are currently pricing in 13 basis points of tightening for the Fed's next meeting.
• Pesole noted that if markets assign at least a two-thirds probability to a hike, the Fed may "feel compelled to act, even without full conviction."

Elevated oil prices are also providing a tailwind for the dollar. Investors are monitoring diplomatic meetings at the U.N. General Assembly, with analysts suggesting positive trade headlines could offer additional support to the currency.

European Outlook

For the euro, recent regional election results in Germany have added "some clouds," but ING strategists view rate differentials and oil prices as the primary drivers. The firm sees "mostly downside risks for EUR/USD" this week but believes a retest of the June lows of $1.1320-30 looks premature.

A move toward those lows would become a "realistic scenario" only if Brent crude moves back towards $110 per barrel and markets increase bets on an October Fed hike, Pesole said. ING's baseline forecast is for a sharp fall in oil prices in the fourth quarter.