Sterling Edges Higher as Middle East Tensions Lift Oil and Support Dollar

The British pound edged higher on Thursday, though the broader currency market theme was a supported U.S. dollar, bolstered by a surge in oil prices after a fresh escalation of conflict in the Middle East reinforced bets on a hawkish Federal Reserve.

As of 07:57 ET, the GBP/USD pair was trading up 0.03% at 1.3390, while the EUR/USD climbed 0.11% to 1.1429, according to data from Investing.com.

Geopolitical Tensions Boost Dollar

The dollar found support after U.S. forces conducted airstrikes on infrastructure targets in northern Iraq. The development pushed Brent crude oil prices briefly above $80 per barrel, fueling expectations that inflationary pressures could keep the Federal Reserve from cutting interest rates soon.

"Higher energy prices will provide fuel for the Fed hawks and keep the dollar supported on dips – particularly against the low yielders," said Chris Turner, Global Head of Markets at ING. The investment bank noted that the U.S. Dollar Index (DXY), trading near 101, could climb back toward the 101.50 area.

Sterling Gains Disconnected from Fundamentals

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Analysts at ING noted that sterling's current strength is not being driven by domestic economic fundamentals. Instead, the move mirrors a pattern seen at the start of the Gulf crisis in March, where geopolitical flare-ups cause the front end of the UK money-market curve to adjust more sharply than the eurozone's, weighing on the EUR/GBP cross.

ING also highlighted that the long-term bear trend in the GBP/CHF pair may be turning, suggesting a move toward 1.10 if energy prices remain elevated, as the Swiss National Bank is expected to be the last G10 central bank to raise rates.

Central Bank Outlook in Focus

Wednesday's Federal Open Market Committee (FOMC) minutes revealed that officials viewed a delayed rate cut and an immediate hike as "equally credible" scenarios. Markets are now looking ahead to comments from New York Fed President John Williams later on Thursday, followed by June CPI data next week.

Meanwhile, the euro has remained resilient despite the oil price spike, with money markets pricing in a 22 basis point hike from the European Central Bank in September. While the ECB's June meeting minutes due Thursday are expected to be hawkish, ING stated, "we think the Fed story will be a more dominant theme," potentially pushing EUR/USD back below the 1.14 level.