Pound and Euro Weaken as Surging Oil Prices Boost US Dollar

The British pound and the euro weakened against the U.S. dollar on Tuesday, as a surge in oil prices fueled by stalled U.S.-Iran nuclear talks bolstered safe-haven demand for the greenback. Brent crude futures approached $107 per barrel, adding to inflationary pressures and complicating the outlook for global central banks.

As of 4:48 AM ET, the pound sterling (GBP/USD) was down 0.19% at $1.3232, while the euro (EUR/USD) fell 0.24% to $1.1344, according to market data.

Oil Prices Drive Dollar Strength

The primary catalyst for the dollar's advance was the rising price of oil, with Brent crude having touched $109 a barrel on Monday. Market optimism for a renewed nuclear deal has faded after Iranian officials reportedly indicated an agreement is unlikely before the U.S. midterm elections on November 3.

According to Francesco Pesole, an FX strategist at ING, "Upside risks for the dollar are building again." Pesole noted that a dollar pullback would require stabilization in the bond market, which is heavily influenced by oil prices, where "the latest news is not encouraging."

Diverging Central Bank Outlooks

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The market's hawkish stance on the Federal Reserve is providing further support for the dollar, with traders pricing in 17 basis points of interest rate hikes before October. In contrast, European Central Bank President Christine Lagarde struck a more dovish tone, stating that tighter financial conditions were already dampening the impact of energy costs and that a "prudent and robust" response was warranted.

Markets are pricing in a more modest 9 basis points of ECB hikes before October. ING's baseline forecast is for both the Fed and the ECB to hold off on any policy changes until their December meetings, though an earlier Fed move would challenge that view.

Sterling Weighed by External Factors

The pound's decline was largely a function of broad-based dollar strength rather than a deterioration in UK fundamentals. Data from the British Retail Consortium (BRC) on Tuesday showed that shop price inflation eased to 1.4% in September from 1.5% in August, driven by food and "back-to-school" discounts.

However, the BRC warned that retailers are facing a limit to how much they can absorb rising costs from business rates, labor, and energy. Meanwhile, Pesole suggested that the euro could test its summer lows around the $1.1320 to $1.1330 range, weighed down by President Lagarde's cautious remarks and the potential for strong U.S. economic data.