Pound Edges Higher as Middle East Tensions Boost Hawkish Fed Bets, Dollar

The British pound ticked higher against the dollar on Thursday, but the primary driver in currency markets was broad-based U.S. dollar strength, fueled by rising oil prices after American military action in the Middle East.

As of 07:57 ET, the GBP/USD pair was up slightly at 1.3390, while the EUR/USD rose to 1.1429.

Geopolitical Tensions Bolster Dollar

The dollar found firm support after U.S. forces conducted strikes on infrastructure targets in northern Iraq. The escalation, the first of its kind since early April, briefly pushed Brent crude oil prices above $80 a barrel.

Analysts noted that higher energy costs could sustain inflationary pressures, reinforcing the case for the Federal Reserve to maintain a hawkish monetary policy stance. "Higher energy prices will provide fuel for the Fed hawks and keep the dollar supported on dips," said Chris Turner, Global Head of Markets at ING. Turner suggested the Dollar Index (DXY), trading near 101, could climb back to the 101.50 area.

Sterling Gains Not Tied to Fundamentals

Sterling's advance was not attributed to domestic economic factors. According to ING, the move reflects a pattern seen in previous geopolitical flare-ups where the front end of the UK money-market curve adjusts more sharply than its eurozone counterpart, putting downward pressure on the EUR/GBP cross.

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The euro, meanwhile, has remained resilient due to growing market bets that the European Central Bank will raise interest rates again in September. However, ING stated, "we think the Fed story will be a more dominant theme," and could see the EUR/USD pair fall back below the 1.14 level.

Focus Turns to Fed Speakers and Data

The market's focus on U.S. monetary policy was sharpened by Wednesday's FOMC minutes, which showed officials viewed delaying a rate cut and implementing an immediate hike as "equally credible" scenarios.

Investors are now looking ahead to several key events for further direction on Fed policy:

• A speech from New York Fed President John Williams later on Thursday.
• The release of June Consumer Price Index (CPI) data next Tuesday.
• Testimony from Fed Chair Kevin Warsh before the House on Wednesday.