Sterling Slips as Geopolitical Tensions and Hawkish Fed Outlook Boost Dollar

The British pound and euro weakened against the U.S. dollar on Wednesday, driven by broad safe-haven demand amid fresh geopolitical tensions in the Middle East and investor positioning ahead of potentially hawkish minutes from the Federal Reserve.

As of 06:15 ET, the pound was down against the dollar, with the GBP/USD pair falling 0.07% to $1.3343. The euro also eased, with EUR/USD slipping 0.08% to $1.1403.

Dollar Gains on Safe-Haven Bids

The dollar's strength was underpinned by investor flight to safety following reports of new U.S. strikes on Iran, which also sent oil prices surging. Brent crude futures jumped nearly 6% to trade near $79 a barrel, fueling concerns about global inflation.

"Equity jitters offered the dollar some support yesterday – a reminder of the greenback’s very strong safe-haven appeal," said Francesco Pesole, an FX strategist at ING, in a note. This sentiment has overshadowed recent tailwinds for sterling, which had been supported by rising bets on a Bank of England rate hike.

Fed Minutes in Focus

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Investors are also looking ahead to the release of the minutes from the Federal Reserve's June policy meeting later today. According to ING, the market expects the details to "cement the hawkish message" delivered at that meeting, which could provide further momentum for the dollar.

"The importance of the Fed’s hawkish shift in June for the dollar cannot be overstated," Pesole noted. He added that market conviction for further tightening relies on the central bank's median dot plot projections and a reaffirmation of its commitment to its inflation mandate. Currently, futures markets are pricing in just 35 basis points of rate cuts by December.

European Currencies Face Headwinds

For sterling, the dollar's broad strength has offset positive domestic factors, such as markets fully pricing in a 25-basis-point interest rate hike by the Bank of England by year-end.

Meanwhile, the euro saw a muted reaction to political news from France, where Marine Le Pen confirmed her intention to run in the 2027 presidential election. ING analysis suggested that downside risks remain for the single currency, stating that "a move below 1.140 [for EUR/USD] is still quite possible this week."