Pound Edges Higher as Middle East Tensions Boost Oil and Hawkish Fed Bets

The British pound traded slightly higher on Thursday, though the primary driver in foreign exchange markets was a broadly supported U.S. dollar, bolstered by escalating geopolitical tensions and a spike in oil prices.

As of 07:57 ET, the GBP/USD pair rose modestly to 1.3390, while the EUR/USD climbed to 1.1429. The moves came after U.S. forces conducted airstrikes in northern Iraq, pushing Brent crude oil briefly above $80 a barrel and strengthening the case for a hawkish Federal Reserve.

Geopolitical Risk Lifts Dollar

The overnight military action in the Middle East has direct implications for inflation expectations, providing support for the U.S. dollar. Analysts note that higher energy costs could keep inflationary pressures elevated, encouraging the Federal Reserve to maintain its restrictive monetary policy for longer.

"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 investment bank suggested the U.S. Dollar Index (DXY), currently trading near 101, could climb back toward the 101.50 area.

Sterling Gains Not UK-Driven

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According to ING, sterling's advance is not a reflection of domestic fundamentals but rather a recurring market pattern. The firm noted that during geopolitical flare-ups, the front end of the UK's money-market curve tends to adjust more sharply than the eurozone's, a dynamic that typically weighs on the EUR/GBP cross.

The euro, meanwhile, has shown resilience to the oil price shock. This is partly due to rising expectations for another European Central Bank rate hike, with money markets now pricing in a 22 basis point increase for September. However, ING analysts believe the Fed's policy path will remain the more dominant theme, potentially pushing EUR/USD back below the 1.14 level.

Markets Await Fed Signals

Investor focus remains squarely on the Federal Reserve's next moves. FOMC minutes released Wednesday showed officials viewed a delayed rate cut and an immediate hike as "equally credible" scenarios.

Upcoming events will be critical for market direction, including a speech later Thursday from New York Fed President John Williams, followed by June's Consumer Price Index (CPI) data next week. A durable shift away from the strong-dollar narrative would likely require clear dovish signals from Fed officials or a de-escalation of tensions in the Gulf.