Pound falls to $1.3481 as Middle East tensions boost dollar demand

The pound slipped to $1.3481 on Tuesday, down 0.2%, as escalating Middle East tensions drove investors into safe-haven dollar assets and renewed concerns over global energy supply.

"The dollar bid reflects a broad risk-off repricing as the Strait of Hormuz disruption threatens to sustain elevated oil prices," said Elena Fischer, geopolitical risk analyst at Edgen. "Markets are pricing in a prolonged period of uncertainty that could keep the Federal Reserve on hold longer than previously expected."

The US Dollar Index traded at 100.30, extending its monthly gain to 1.9% after recovering from early-2026 lows near 95. The index remains about 3.8% below its 52-week peak of 104.50, but the recent rally has been driven by a combination of safe-haven flows and expectations that the Fed will maintain its restrictive stance. Brent crude, which surged above $110 a barrel after the Strait of Hormuz blockade, has since eased to near $102 as diplomatic efforts between the US and Iran showed tentative signs of progress.

The Strait of Hormuz handles about 21% of global oil trade, and the blockade has pushed energy prices to levels that threaten to reignite inflation. The last time a similar disruption occurred — during the 2019 tanker attacks in the Gulf of Oman — Brent crude spiked 15% over three weeks while the dollar gained 2% against a basket of major currencies. This time, the scale of the disruption is larger, with the blockade now in its second week.

Rate Expectations Shift as Energy Costs Climb

The Fed has held its benchmark rate at 5.25% to 5.50% since July 2023, and markets had been pricing in a first cut by September. But the surge in energy costs has complicated that outlook. Overnight index swaps now imply a 45% probability of a hold through year-end, down from 62% a month ago, as traders weigh the risk that higher fuel prices feed through to core inflation.

"If oil stays above $100, the Fed's path becomes much harder to navigate," Fischer said. "They can't cut into an energy-driven inflation spike without risking a repeat of the 1970s wage-price spiral, but holding rates high also risks tipping an already slowing economy into recession."

The cross-asset reaction has been broad. Two-year Treasury yields rose 8 basis points to 4.12% on Tuesday, while the S&P 500 fell 0.6% as energy and financial stocks outperformed but tech and consumer discretionary lagged. Gold edged up 0.3% to $2,358 an ounce, reflecting the safe-haven bid, though the dollar's strength capped gains.

GBP Under Pressure From Multiple Fronts

Sterling's weakness extends beyond the dollar rally. UK economic data has softened, with employment figures showing rising unemployment and slower wage growth, while inflation cooled more rapidly than forecast. PMI surveys revealed an unexpected contraction in the UK services sector, and retail sales data disappointed, reinforcing concerns over consumer spending.

The pound had found some support in recent weeks as fears over Labour Party leadership instability eased, with Prime Minister Keir Starmer avoiding an immediate leadership challenge. But the geopolitical shock has overwhelmed those domestic tailwinds, pushing GBP/USD below its 50-day moving average of $1.3520 for the first time in three weeks.

Traders are now watching for a break below $1.3440, the May 20 low, which could open the door to $1.3350. On the upside, resistance sits at $1.3550, the level that held through mid-May.

What to Watch This Week

The economic calendar is packed. Fed Chair Jerome Powell speaks Wednesday, followed by ADP payrolls, ISM manufacturing data, and the all-important nonfarm payrolls report on Friday. A strong jobs number would reinforce the case for higher-for-longer rates, potentially extending the dollar's rally. A miss, however, could unwind some of the recent gains.

For the pound, the domestic calendar is quiet, leaving sterling at the mercy of geopolitical headlines and dollar flows. If diplomatic efforts in the Middle East gain traction, the safe-haven bid could fade quickly, offering the pound a reprieve. If tensions escalate further, GBP/USD could test $1.3350 within days.

This article is for informational purposes only and does not constitute investment advice.