Story
Pound Edges Higher as Middle East Tensions Boost Oil and Dollar
Summary
The U.S. dollar strengthened after military strikes in Iraq pushed oil prices higher, fueling bets that the Federal Reserve will maintain a hawkish stance. Sterling's gains were seen as technical, while the euro showed resilience on ECB rate hike expectations.
The British pound traded slightly higher on Thursday, but the U.S. dollar gained broad support as rising oil prices, spurred by U.S. airstrikes in the Middle East, reinforced expectations for a hawkish Federal Reserve.
As of 11:57 GMT, the GBP/USD pair was up 0.03% at 1.3390, while the EUR/USD climbed 0.11% to 1.1429.
Geopolitical Tensions Bolster Dollar
The dollar found support after U.S. forces conducted airstrikes on infrastructure targets in northern Iraq overnight. The escalation pushed Brent crude oil prices briefly above $80 per barrel, fueling concerns about inflation.
Analysts at ING noted that higher energy prices are likely to reinforce the hawkish stance of the Federal Reserve, keeping the dollar supported. "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. The bank suggested the U.S. Dollar Index (DXY), trading near 101, could climb toward the 101.50 area.
Sterling and Euro Divergence
AdSterling's modest gains were not attributed to UK economic fundamentals. According to ING, the move is a technical pattern seen during past geopolitical crises, where the sterling money-market curve adjusts more sharply than the eurozone's, putting downward pressure on the EUR/GBP cross.
The euro, meanwhile, has "held up remarkably well" despite the oil spike, ING said. Its resilience stems from growing bets that the European Central Bank will raise interest rates again in September. Money markets are now pricing in a 22 basis point hike for that meeting. The release of minutes from the ECB's June meeting later on Thursday is expected to confirm a hawkish tone.
Market Outlook
Looking ahead, investors are focused on signals from the Federal Reserve. FOMC minutes released Wednesday showed officials viewed a delayed rate cut and an immediate hike as "equally credible" scenarios. The market will be watching for commentary from New York Fed President John Williams later on Thursday, followed by June CPI data next Tuesday.
ING suggested the Fed's policy path will remain the "more dominant theme" for currency markets. This could lead the EUR/USD pair to reverse its gains and trade back below the 1.14 level, barring a significant dovish shift from the Fed or a de-escalation of tensions in the Gulf.