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

The British pound edged higher against the U.S. dollar on Thursday, but the move was overshadowed by broader market dynamics as geopolitical tensions in the Middle East pushed oil prices higher and reinforced expectations for a hawkish Federal Reserve.

As of 07:57 AM ET (11:57 GMT), the GBP/USD currency pair was up approximately 0.03% to 1.3390.

Geopolitical Tensions Bolster Dollar

The main catalyst for market moves was an overnight U.S. military strike on infrastructure targets in northern Iraq, which immediately escalated regional tensions. The action caused Brent crude oil futures to spike, briefly pushing the global benchmark above $80 per barrel.

Rising energy costs tend to be inflationary, strengthening the case for the U.S. Federal Reserve to maintain a hawkish monetary policy stance. According to Chris Turner, Global Head of Markets at ING, "Higher energy prices will provide fuel for the Fed hawks and keep the dollar supported on dips." This sentiment helped the U.S. Dollar Index (DXY) trade near the 101 level.

Currency-Specific Moves

Ad

The pound's advance was not driven by the UK's economic fundamentals. Instead, analysts at ING noted a recurring pattern where geopolitical flare-ups cause the sterling money-market curve to adjust more sharply than the eurozone's, a dynamic that tends to put downward pressure on the EUR/GBP exchange rate.

The euro also firmed against the dollar, with EUR/USD climbing 0.11% to 1.1429. ING described the euro as having "held up remarkably well" given the oil price shock. Its resilience was attributed to growing bets on another European Central Bank rate hike in September, with money markets pricing in an increase of 22 basis points.

What Investors Are Watching

Market participants are now looking ahead to several key events for further direction. These include a speech later Thursday from New York Fed President John Williams, U.S. June inflation data next Tuesday, and testimony from Fed Chair Kevin Warsh on Wednesday.

While minutes from the ECB's June meeting are also due, ING suggested that "the Fed story will be a more dominant theme." The firm anticipates that a persistent dollar narrative could push the EUR/USD pair back below the 1.14 level in the near term.