Pound Edges Higher as Middle East Tensions Fuel Hawkish Fed Outlook

The British pound firmed against the U.S. dollar on Thursday, though broader currency movements were dominated by a surge in oil prices and expectations for a prolonged hawkish stance from the Federal Reserve following U.S. military strikes in the Middle East.

As of 07:57 ET, the GBP/USD pair traded 0.03% higher at 1.3390, while the EUR/USD pair rose 0.11% to 1.1429.

Oil Surge Reinforces Dollar Strength

The dollar found broad support after U.S. forces conducted strikes on infrastructure targets in northern Iraq, the first such action since early April. The escalation in geopolitical tension pushed Brent crude futures briefly above $80 per barrel, fueling concerns about inflationary pressures.

Analysts noted that higher energy costs could reinforce the Federal Reserve's commitment to maintaining higher interest rates 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, in a note to clients.

Sterling Gains Not Tied to Fundamentals

According to ING, the pound's modest gains were not driven by UK economic fundamentals but rather by market dynamics seen during previous geopolitical crises. The firm noted that sterling money markets tend to adjust more sharply than their eurozone counterparts in such scenarios, which supported the pound relative to the euro.

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The euro itself held up well despite the oil spike, with money markets pricing in a 22 basis point interest rate hike from the European Central Bank (ECB) in September. However, ING suggested the "Fed story will be a more dominant theme" and could push EUR/USD back below the 1.14 level.

Market Outlook and Key Events

Recent minutes from the Federal Open Market Committee (FOMC) revealed that officials viewed delaying a rate cut and implementing an immediate hike as "equally credible" options. This sentiment has kept markets anticipating continued tightness in U.S. monetary policy.

Investors are now looking ahead to several key events for further direction, including:

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