Sterling Gains as Middle East Tensions Lift Oil, Bolster Hawkish Fed Bets

The British pound traded slightly higher on Thursday, but broader currency market movements were dictated by a supported U.S. dollar as escalating geopolitical tensions in the Middle East pushed oil prices higher and reinforced bets that the Federal Reserve will maintain a hawkish monetary policy.

As of 07:57 ET, the GBP/USD pair was up 0.03% at 1.3390, while the EUR/USD rose 0.11% to 1.1429.

Geopolitical Risk Fuels Dollar Strength

The dollar found support after U.S. forces conducted strikes on infrastructure targets in northern Iraq, which briefly pushed the price of Brent crude oil above $80 per barrel. Analysts noted that sustained high energy costs could complicate the Federal Reserve's efforts to control inflation.

"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 suggested the Dollar Index (DXY), trading near 101, could climb back toward the 101.50 area.

Sterling and Euro Dynamics

Sterling's advance was not driven by domestic fundamentals, according to ING. The firm noted the price action "repeats the performance at the start of the Gulf crisis in early March," a pattern where the front end of the UK's money-market curve adjusts more sharply than the eurozone's, weighing on the EUR/GBP cross.

Ad

The euro has remained resilient despite the spike in oil prices. This is partly due to rising bets that the European Central Bank (ECB) will hike rates again in September, with money markets pricing in a +22 basis point move. However, ING believes the Federal Reserve's policy direction will be a "more dominant theme" and could push EUR/USD back below the 1.14 level.

Central Bank Outlook

Investor focus remains squarely on central bank policy. Minutes from the Federal Open Market Committee's (FOMC) last meeting, released Wednesday, showed officials viewed delaying a rate cut and implementing an immediate hike as "equally credible" scenarios.

Markets 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 U.S. June CPI data next Tuesday.
• Testimony from Fed Chair Kevin Warsh before the House on Wednesday.

Meanwhile, minutes from the ECB's June 11 meeting are also due Thursday and are widely expected to carry a hawkish tone.