Story
Pound Edges Higher as Middle East Tensions Boost Oil and the Dollar
Summary
The British pound saw modest gains, but the dominant market theme was a stronger U.S. dollar, supported by a spike in oil prices following U.S. military action in Iraq which has bolstered hawkish Federal Reserve expectations.
The British pound traded slightly higher on Thursday, though the U.S. dollar remained broadly supported after military strikes in the Middle East pushed oil prices higher and reinforced expectations for a hawkish Federal Reserve.
As of 07:57 ET, the GBP/USD pair rose a marginal 0.03% to 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 strikes on infrastructure targets in northern Iraq, which briefly pushed Brent crude oil prices above $80 a barrel. The move in energy prices has direct implications for inflation and central bank policy.
"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. Analysts at the firm noted that the U.S. Dollar Index (DXY), trading near 101, could climb toward the 101.50 area as a result.
Sterling Gains Lack Fundamental Support
According to ING, sterling's modest gains are not being driven by UK economic fundamentals. Instead, the move reflects a pattern seen in previous geopolitical crises where the front end of the sterling money-market curve adjusts more sharply than its eurozone counterpart, putting downward pressure on the EUR/GBP cross.
AdThe euro has remained resilient despite the oil price spike, with money markets now pricing in +22 basis points of rate hikes from the European Central Bank by its September meeting. However, analysts at ING believe the Federal Reserve's policy path will be the more dominant theme for currency markets.
Market Outlook and Key Events
Looking ahead, the focus remains on the Federal Reserve. Minutes from the last FOMC meeting revealed officials viewed a delayed rate cut and an immediate hike as "equally credible" scenarios. The market narrative could be influenced by several upcoming events:
- A speech from New York Fed President John Williams later on Thursday.
- U.S. Consumer Price Index (CPI) data for June, due next Tuesday.
- Testimony from Fed Chair Kevin Warsh before the House on Wednesday.
ING suggested that unless these events provide a clear dovish signal or geopolitical tensions de-escalate, the dollar is likely to remain strong, potentially pushing EUR/USD back below the 1.14 level.