British Pound Slips Below $1.35 as Surging Oil and Fed Rate Hike Bets Boost Dollar

The British pound fell on Monday, dipping below the key $1.35 level as a broad-based rally in the U.S. dollar gained momentum. The move was primarily driven by a sharp rise in oil prices and investor positioning ahead of an anticipated interest rate increase by the U.S. Federal Reserve.

Dollar Dominance Weighs on Sterling

The GBP/USD currency pair traded down 0.33% to 1.3482 in early trading, according to data from Investing.com. The decline was not attributed to any UK-specific economic data or central bank commentary, with strategists linking the pound's weakness directly to the dollar's strength.

The euro also weakened against the greenback, with the EUR/USD pair falling 0.55% to 1.1535. The U.S. Dollar Index (DXY), which measures the dollar against a basket of major currencies, pushed higher, reflecting the widespread demand for the currency.

Oil and Fed Policy Fuel Rally

Two main factors are underpinning the dollar's ascent:

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• Surging Oil Prices: Brent crude futures climbed over 3% after Saudi Arabia announced the shutdown of its East-West pipeline following drone attacks. Higher energy prices can stoke inflation concerns and often benefit the U.S. dollar, the primary currency for oil trading.
• Hawkish Fed Expectations: Markets are pricing in a near-certainty of a 22-basis-point interest rate hike from the Federal Reserve on Wednesday. According to Francesco Pesole, an FX Strategist at ING cited in the source report, hotter-than-expected U.S. CPI data last week "all but sealed" the move.

Analyst Outlook

Analysts suggest the dollar could have more room to run. Pesole noted that a "message of monetary policy rigour by the Fed on Wednesday can help slowly rebuild the positive USD-Treasury yield correlation." ING sees a return to the 99.50-100 range in the DXY as a "tangible possibility."

For the pound, this environment suggests continued vulnerability. With its trajectory tied to the euro's losses and broad market sentiment rather than domestic drivers, sterling's path will likely be dictated by the Fed's tone and ongoing geopolitical risks in the energy market.