Sterling Edges Higher as Middle East Tensions Boost Hawkish Fed Bets

The British pound and euro edged higher against the U.S. dollar on Thursday, though the gains were overshadowed by a broader dollar strengthening narrative. Escalating geopolitical tensions in the Middle East pushed oil prices higher, reinforcing investor bets that the U.S. Federal Reserve will maintain its hawkish monetary policy stance.

Geopolitical Tensions Bolster Dollar

The dollar found support after U.S. forces conducted overnight airstrikes on infrastructure targets in northern Iraq, the first such action since early April. The development briefly sent Brent crude oil above $80 a barrel, stoking inflation concerns.

According to analysis from ING, higher energy prices provide "fuel for the Fed hawks and keep the dollar supported on dips." The U.S. Dollar Index (DXY), which measures the greenback against a basket of currencies, traded near 101, with analysts at ING noting it could climb toward the 101.50 area.

Sterling and Euro Gains Disconnected from Fundamentals

Despite the dollar's underlying strength, the GBP/USD pair traded up 0.03% to 1.3390 in morning trade. Analysts at ING noted that sterling's gains were not driven by UK fundamentals but rather a recurring market pattern during geopolitical crises where the UK money-market curve adjusts more sharply than its eurozone counterpart.

Ad

The euro also firmed, with EUR/USD climbing 0.11% to 1.1429. The single currency has proven resilient, supported by rising expectations for another European Central Bank rate hike in September. Money markets are currently pricing in a 22 basis point increase.

Fed Policy Remains in Focus

The focus on Fed policy comes after Wednesday’s FOMC minutes revealed officials viewed a delayed rate cut and an immediate hike as "equally credible" scenarios. Market participants are now looking ahead to several key events for further direction:

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

ING suggested the Fed's policy path will remain the dominant theme for currency markets, potentially pushing EUR/USD back below the 1.14 level unless upcoming data provides a clear dovish signal or tensions in the Gulf de-escalate.