Sterling slipped back on Tuesday, with GBP/USD unable to hold onto a tentative rebound from the previous session as a firm dollar and renewed jitters over the Middle East put downward pressure on the pound.
As of 08:55 ET (12:55 GMT), GBP/USD had declined 0.25% to 1.3468, retreating from an open of 1.3496 and a session peak of 1.3497. The move reversed a modest 0.10% gain recorded on Monday.
EUR/USD was largely unchanged, down roughly 0.09% at 1.1633, underlining that the pound’s weakness was driven more by dollar strength than by broad euro appreciation.
Dollar dynamics and central bank signals
The dollar’s inability to give ground, even while global equities continued to price in some de-escalation in the Middle East, has drawn growing attention from market participants. Analysts at ING point to a market view that the Federal Reserve may be moving away from a dovish stance - a backdrop that supports the greenback at a time when softer activity data is prompting questions about how aggressively other central banks can tighten.
Fed Governor Christopher Waller’s speech last Friday briefly led markets to price in a full 25 basis point Fed hike, a development that contributed to a bearish flattening of the US yield curve and provided a clear boost to the dollar.
ING expects the dollar index (DXY) to remain supported within a 99.00-99.50 range. The group identifies Thursday’s U.S. personal consumption expenditures (PCE) inflation release as the most significant near-term risk for a DXY breakout, noting that Governor Waller estimates headline inflation will have risen to 3.8% year-on-year.
Middle East developments temper risk appetite
Markets were further dampened by setbacks in hopes for a durable ceasefire in the Middle East. Iran’s Islamic Revolutionary Guard Corps issued a warning that retaliatory strikes against the U.S. would be "legitimate and definite" should Washington violate the ongoing ceasefire. Tasnim, an agency closely linked to the IRGC, reported that Iranian forces had fired on an American drone and had "drove off" a fighter jet.
U.S. Central Command confirmed it carried out fresh "defensive" strikes in southern Iran targeting missile launch sites and mine-laying boats, while stressing the action did "not indicate ceasefire is over." These developments cooled recent optimism that Washington and Tehran were nearing an agreement to extend the ceasefire and reopen the Strait of Hormuz. Secretary of State Marco Rubio said reopening the strait could "take a few days," and vowed it would reopen "one way or another."
Commodities and inflation implications
Crude oil has surged by over 50% since the conflict began. With U.S. PCE inflation data due this week and expected to reflect an energy-driven price shock, the Bank of England faces a disinflation path that is growing more complex by the week.
ING also observes that EUR/USD fair value remains around the 1.16/17 area. They see no convincing case for a slide to 1.1500 unless there is a more hawkish shift from FOMC members or a continued string of disappointing European data - a risk that has been reinforced by last week’s softer PMI readings.
Market implications
- FX markets are contending with a resilient dollar and renewed geopolitical risk, which is keeping pairs like GBP/USD under pressure.
- Energy markets are sensitive to ceasefire developments; a >50% rise in crude since the conflict began increases the risk of higher headline inflation readings in upcoming U.S. data.
- Central bank policy expectations - notably around the Fed and the Bank of England - remain an important driver of currency moves as markets interpret speeches and incoming data.