Sterling fell on Monday as a rise in energy prices tied to renewed U.S. strikes on Iran and worries over transit through the Strait of Hormuz lifted demand for the dollar and other commodities-linked assets.
At 06:05 ET (10:05 GMT), GBP/USD was down 0.11% at 1.3392, moving away from the highs recorded late last week. EUR/USD in contrast ticked up 0.17% to 1.1432.
Market participants and strategists say the main force shaping G10 currency moves is energy-related risk rather than domestic monetary settings. Chris Turner, Global Head of Markets at ING, summed up the prevailing market dynamics: "Lower FX volatility and the simmering conflict in the Gulf are the two dominant themes driving FX markets right now."
Turner expanded on that view, noting the differing demand patterns produced by those two themes: "The former drives strong demand for high-yielding FX, and the latter drives demand for oil-exporting FX." He also highlighted a structural factor that could amplify dollar gains if Iran succeeds in curbing traffic through the Strait of Hormuz: "US energy independence will come back to the fore if Iran is effective in re-closing the Strait of Hormuz."
Attention in markets now turns to a busy U.S. economic calendar that could strengthen the dollar’s position further. June consumer price index (CPI) prints are due Tuesday, with headline inflation expected to decline month-on-month while core inflation is forecast to remain around 2.8-2.9% year-on-year. Those readings leave the prospect of additional Federal Reserve tightening on the table.
New Fed Chair Kevin Warsh begins two days of Congressional testimony on Tuesday. ING characterizes his expected posture as likely to be non-committal, while other scheduled releases - the Fed’s Beige Book on Wednesday and producer prices data - will provide further inputs ahead of the July 29 Federal Open Market Committee meeting. "It looks too early for the market to price out a Fed rate hike this year," Turner said.
The slide in sterling on Monday is not attributed to developments in the U.K. economic or political backdrop. Domestic politics appear orderly, with Andy Burnham scheduled to be confirmed as Labour leader on Friday and formally appointed prime minister the following Monday. Sterling’s ability to hold up through recent political change suggests markets have largely priced the transition.
Consequently, the pound’s move below $1.34 is viewed as a response to external pressures - namely oil prices, a stronger dollar and shifts in risk appetite - rather than an immediate sign of UK-specific deterioration. Market pricing still includes at least one Bank of England rate increase later in the year, and possibly a second, which limits the pound’s downside versus the euro even as it loses ground to a dollar buoyed by geopolitical risk premia.
ING singles out the euro as particularly exposed because Europe remains both an energy importer and a provider of relatively low-yielding assets. The region’s natural gas inventories are low during a heatwave, adding to medium-term cost pressures. On directional guidance, Turner suggested downside for the euro: "EUR/USD can easily drift down to the 1.1360 area and could test the 1.1300/25 area this month," a zone ING views as a likely summer trading-range floor. ECB President Christine Lagarde is scheduled to meet Warsh in Washington on Monday, though ING does not expect policy clues to emerge from that meeting.
Other dollar measures show the greenback grinding toward the 101.50 level on the dollar index, while USD/CHF has retraced to around 0.8140. Turning the current dollar bid on its head would require lower energy prices and a substantive shift away from the Fed’s tightening bias, Turner argued - outcomes he deems improbable in the near term.
With key U.S. inflation data and Fed commentary due this week, currency markets are likely to remain sensitive to shifts in energy prices and geopolitical developments linked to the Gulf. Those two forces are currently the primary drivers dictating flows into higher-yielding currencies and oil-exporting currencies, and they will be watched closely by investors assessing near-term FX trajectories.