Sterling remained marginally above the $1.34 mark on Wednesday while the euro hovered close to $1.16, both currencies easing slightly as the dollar gained ground ahead of the Federal Reserve's policy decision. Oil prices extended their slide, keeping Brent crude under $80 a barrel.
As of 08:34 ET (12:34 GMT), GBP/USD was trading 0.16% lower at 1.3409, and EUR/USD had slipped 0.09% to 1.1597.
Traders and strategists are watching the Fed meeting closely - the first policy announcement under Chair Kevin Warsh - for confirmation that policymakers remain willing to tighten further if needed. ING strategist Francesco Pesole flagged that the dollar's current resilience "now seems to rely solely on Fed hike bets," making the meeting a pivotal moment for near-term currency direction.
Market expectations, according to ING's baseline scenario, anticipate that removing any easing bias from the Fed statement and excluding a cut from the median 2026 dot plot should leave the dollar broadly unchanged. That said, the U.S.-Iran peace deal has introduced downside pressure for the dollar, with the swap curve still pricing about 21 basis points of additional tightening by December.
Energy markets have responded to the geopolitical development, with Brent staying below the $80 threshold. That drop in oil has fed through to a more dovish undertone for inflation-sensitive financial markets, juxtaposed against an otherwise hawkish narrative around U.S. monetary policy.
For the euro, Pesole described EUR/USD as "aiming for stabilisation" near 1.160 and forecast consolidation within a 1.160-1.1650 range. The strategist cited financial incentives embedded in the U.S.-Iran settlement as lending durability to the recent oil decline.
Sterling's modest weakness also reflects fresh UK inflation data released on Wednesday. Headline consumer price inflation unexpectedly held at 2.8% in May versus a consensus forecast of 3.0%. Core inflation edged up to 2.6%, while services inflation rose to 3.7%.
Those figures leave the Bank of England's decision on Thursday finely balanced. Market pricing anticipates a hold at 3.75% in a likely 7-2 vote split, and traders are pricing in only one further hike, with full pricing for that move not expected until December.
Pesole flagged upside risks for EUR/GBP, noting that around 30 basis points of priced BoE tightening appears too hawkish and that political risk could re-emerge after Thursday's Makerfield by-election, which some view as a potential catalyst for Andy Burnham to challenge Keir Starmer for the Labour leadership.
Bank of America (Citi) analysts struck a similar cautionary tone, maintaining a bullish bias on EUR/GBP but noting the pair is once again "re-testing the bottom of the range around 0.86." They attribute recent moves more to overseas buying of gilts than to changes in rate expectations. With "flows and fundamentals at odds," Citi said its directional conviction had weakened, though low implied volatility makes options strategies such as straddles and strangles attractive heading into this week's policy and political catalysts.