Sterling Firms Against Dollar as Mideast Tensions Lift Oil Prices

The British pound edged higher against the U.S. dollar on Thursday, showing resilience even as the greenback gained broad support from a spike in oil prices following U.S. military strikes in the Middle East.

As of 07:57 ET, the GBP/USD currency pair rose slightly to 1.3390, while the EUR/USD also climbed to 1.1429.

Geopolitical Tensions Bolster Dollar

The dollar found support after U.S. forces conducted strikes on infrastructure targets in northern Iraq overnight, the first such action reported since early April. The escalation immediately pushed Brent crude oil futures briefly above $80 a barrel.

The surge in energy prices reinforced investor bets that the U.S. Federal Reserve will need to maintain a hawkish monetary policy stance to combat potential inflation. "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. This sentiment supported the Dollar Index (DXY), which traded near the 101 level.

Sterling's Counterintuitive Strength

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Analysts noted that the pound's gains were not driven by UK economic fundamentals. Instead, the move was attributed to a pattern seen in previous geopolitical flare-ups where the UK's short-term money-market curve adjusts more sharply than its eurozone counterpart.

This dynamic tends to put downward pressure on the EUR/GBP pair, which in turn lends support to sterling against the dollar. ING also highlighted that the long-term downtrend in the GBP/CHF pair could be turning, particularly if elevated energy prices cause the Swiss franc to lag as the Swiss National Bank is expected to be the last G10 central bank to raise rates.

Euro Resilience and Market Outlook

The euro has "held up remarkably well" given the oil price shock, according to ING. The currency's strength is linked to growing expectations of another European Central Bank rate hike in September, with money markets pricing in a 22-basis-point increase.

Looking ahead, markets are focused on several key events, including comments from New York Fed President John Williams later Thursday, June U.S. CPI data next Tuesday, and testimony from Fed Chair Kevin Warsh. Wednesday's FOMC minutes revealed officials saw a delayed rate cut and an immediate hike as "equally credible" scenarios, highlighting policy uncertainty.