Sterling Gains as Surging Oil Prices Buoy Safe-Haven Dollar

The British pound ticked higher against the U.S. dollar on Monday, but the dominant theme in currency markets was a flight to safety that bolstered the greenback. A sharp rise in energy prices, driven by escalating U.S.-Iran tensions, reinforced support for the dollar and currencies of energy-exporting nations.

As of 07:55 ET, the pound was up 0.08% against the dollar at $1.3465. In contrast, the euro slipped 0.05% to $1.1433, highlighting the dollar's broad strength.

Oil Prices Drive Dollar Demand

The primary market driver was the surge in Brent crude, which climbed above $90 a barrel to its highest level in over a month, marking its largest weekly gain since April. Higher energy prices and geopolitical uncertainty typically increase demand for the U.S. dollar as a safe-haven asset.

"In this environment we struggle to see that any investors already owning dollars will be inclined to sell," said Chris Turner, global head of markets at ING, in a client note. The Dollar Index (DXY) remains about 1% below its June highs, a gap ING attributes to recent softer-than-expected U.S. inflation data that has trimmed expectations for Federal Reserve tightening. Markets are currently pricing in approximately 40 basis points of Fed rate cuts over the next nine months.

Sterling's Resilience and UK Politics

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While the pound showed modest gains, analysts suggest its strength may be driven by technical factors rather than domestic news. The source cited reports of Andy Burnham succeeding Keir Starmer as Prime Minister, with Shabana Mahmood as a likely Chancellor, which has reassured markets about the new government's fiscal plans.

However, ING suggests other forces are at play. "We think a larger part of sterling’s strength owes to stale short sterling positioning, and we suspect some large M&A flows going through, where cheaper valuations have made UK equities an attractive proposition this year," Turner noted. The firm sees near-term support for the EUR/GBP cross at 0.8470.

Euro Faces Headwinds Ahead of ECB

The euro weakened under the pressure of high energy prices, which weigh on the Eurozone's energy-importing economy. The European Central Bank (ECB) is scheduled to meet on Thursday. While ING's baseline expectation is for the central bank to hold rates steady, Turner flagged the risk that a second rate hike could be brought forward.

ING analysts stated they "favour EUR/USD moving back below 1.14 on these high energy prices," setting a target of 1.1380 for the week. A de-escalation in the Gulf that leads to lower crude prices was cited as the main risk to this outlook.