Sterling Edges Higher as Mideast Airstrikes Boost Oil, Dollar

The British pound edged higher against the U.S. dollar on Thursday, though the primary driver in currency markets was geopolitical tension that lifted oil prices and strengthened bets on a hawkish Federal Reserve. The euro also firmed amid expectations of a more aggressive European Central Bank.

As of 07:57 AM ET (11:57 GMT), the GBP/USD currency pair was trading at 1.3390, an increase of 0.03%. Meanwhile, EUR/USD climbed 0.11% to 1.1429.

Geopolitical Tensions Fuel Hawkish Fed Bets

The dollar found broad support after U.S. forces conducted airstrikes on infrastructure targets in northern Iraq overnight. The action, reported as the first of its kind since early April, briefly pushed the price of Brent crude oil above $80 per barrel.

Analysts at ING noted that rising energy costs are likely to reinforce the position of hawkish policymakers at the Federal Reserve. "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. The firm suggested the U.S. Dollar Index (DXY), trading near 101, could climb toward the 101.50 level.

Sterling Gains Not Tied to UK Fundamentals

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According to ING, sterling's gains are not being driven by the UK's domestic economic picture. Instead, the move mirrors a pattern observed during previous geopolitical flare-ups, where the front end of the sterling money-market curve adjusts more sharply than its eurozone equivalent, putting downward pressure on the EUR/GBP pair.

This dynamic highlights how external factors, rather than local fundamentals, are currently influencing the pound's valuation. The analysis also pointed to a potential turn in the long-term downtrend for the GBP/CHF pair, with 1.10 seen as the next target if energy prices remain elevated.

Central Bank Outlook in Focus

Recent minutes from the Federal Open Market Committee (FOMC) showed officials viewed delaying a rate cut and implementing an immediate hike as "equally credible" scenarios. Investor focus is now on an upcoming speech by New York Fed President John Williams, who is generally considered dovish, as well as June CPI data and congressional testimony from Fed Chair Kevin Warsh.

The euro has remained resilient despite the spike in oil, supported by growing bets that the European Central Bank will raise rates again in September. However, ING stated that the Federal Reserve's policy narrative is expected to be the "more dominant theme," potentially pushing EUR/USD back below the 1.14 level.