Sterling Firms as Middle East Airstrikes Boost Oil and US Dollar

The British pound edged higher against the U.S. dollar on Thursday, though the broader currency market was driven by a stronger greenback and rising oil prices following U.S. military action in the Middle East.

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

Geopolitical Tensions Drive Markets

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

This surge in energy costs reinforces expectations that the U.S. Federal Reserve will maintain a hawkish monetary policy stance to combat potential inflationary pressures. According to analysis from ING, "Higher energy prices will provide fuel for the Fed hawks and keep the dollar supported on dips."

Central Bank Outlooks Diverge

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Sterling's modest gains were not seen as a reflection of UK economic fundamentals. Analysts at ING noted the move repeats a pattern from previous geopolitical crises where the sterling money-market curve adjusts more sharply than the eurozone's, putting downward pressure on the EUR/GBP currency pair.

The euro remained resilient, which ING attributed to growing bets that the European Central Bank will raise interest rates again in September. Money markets are currently pricing in a 22 basis point hike. However, ING suggested the Fed's policy outlook will be the more dominant theme, potentially pushing EUR/USD back below the 1.14 level.

What to Watch

Market participants are now looking ahead to several key events that could provide further direction for currency markets:

• A speech from New York Fed President John Williams later on Thursday.
• The release of U.S. Consumer Price Index (CPI) data for June.
• Testimony from Federal Reserve Chair Kevin Warsh before the House on Wednesday.