Pound Sterling Slips Below $1.35 as Surging Oil Prices Fuel Dollar Rally

The British pound weakened on Monday, trading below the $1.35 mark as a broad-based rally in the U.S. dollar weighed on major currencies. The move was primarily driven by a sharp rise in oil prices and anticipation of a hawkish interest rate hike from the U.S. Federal Reserve.

Dollar Strength Hits Sterling and Euro

The pound's decline was not linked to UK-specific economic data, with strategists attributing the weakness to external factors. Key currency movements included:

• GBP/USD fell 0.33% to 1.3482.
• EUR/USD dropped 0.55% to 1.1535, breaking below the 1.1600 level it maintained last week.

Analysts noted that sterling's recent performance has been tracking the euro's losses against the dollar rather than following any domestic catalyst.

Oil and Fed Policy Drive Markets

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The dollar's strength was underpinned by two main developments. First, Brent crude oil prices jumped over 3% after Saudi Arabia reportedly shut down its East-West pipeline following drone attacks. Rising energy prices tend to support the dollar due to its safe-haven status and implications for global inflation.

Second, markets are preparing for the Federal Reserve's policy announcement on Wednesday. According to Francesco Pesole, an FX Strategist at ING, hotter-than-expected U.S. inflation data last week has "all but sealed" a rate hike, with traders pricing in a near-unanimous 22-basis-point increase. Pesole noted the Fed "may retain a hawkish tone given the bond market’s demand for policy credibility and recent rise in energy prices."

Outlook

Looking ahead, ING strategists see the potential for continued dollar strength. "We continue to favour a moderately stronger dollar from here," Pesole stated, adding that a return to the 99.50-100.00 range for the DXY dollar index "remains a tangible possibility."

This outlook suggests further pressure could be in store for both the pound and the euro. While hawkish messaging from the European Central Bank last week may slow the euro's decline, ING's near-term target for EUR/USD remains 1.1500, according to the report.