The British pound stabilized below $1.34, while the euro remained near $1.16, with both currencies easing slightly from the high levels recorded in the previous session, as the U.S. dollar regained broad momentum despite the sharp decline in oil prices.
The dollar’s strength comes despite the continued fall in crude prices following the initial announcement of a ceasefire agreement between the United States and Iran. Analysts believe the dollar’s performance in recent hours reflects a structural improvement compared with recent weeks, after it managed to recover most of the losses recorded over the weekend.
ING analysts noted that currency markets have started shifting their attention away from oil price movements and toward central bank policies, as monetary policy expectations are now being shaped more by economic data and messages from policymakers rather than energy prices.
Attention is turning to the Federal Open Market Committee meeting, amid pressure on the Federal Reserve to keep the possibility of tighter monetary policy on the table. Analysts believe the dollar needs supportive signals from policymakers to maintain its current strength, warning that hawkish messages alone may not be enough to convince markets.
As for the euro, ING indicated that the European currency’s stability remains fragile, after its recent gains faded and it returned to levels seen at the end of last week. The bank also pointed to the widening two year interest rate swap spread between the euro and the dollar, which keeps downside risks in place, with EUR/USD potentially falling below $1.15 if doubts return over the sustainability of the agreement or if the full reopening of the Strait of Hormuz is delayed.
As for the British pound, markets expect the Bank of England to keep interest rates unchanged at 3.75%, amid division within the Monetary Policy Committee between concerns over persistent inflation and signs of weakness in the labor market. Market pricing currently points to only one additional interest rate hike this year, with full pricing not expected before December.
Markets are also closely watching the upcoming by election in the Mickerfield constituency, where a victory for Andy Burnham is seen as a factor that could open the door to a leadership challenge within the Labour Party, potentially adding further pressure on the British pound.
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