Investing.com — Sterling traded lower on Monday while the euro held fractional gains, as surging energy prices linked to renewed U.S. strikes on Iran and fears over Strait of Hormuz shipping kept the dollar broadly bid against low-yielding currencies.
As of 06″05 ET (10:05 GMT), fell 0.11% to 1.3392, retreating from highs touched last week. edged 0.17% higher to 1.1432.
The dominant driver across G10 markets is energy, not domestic monetary policy, according to Chris Turner, Global Head of Markets at ING. “Lower FX volatility and the simmering conflict in the Gulf are the two dominant themes driving FX markets right now,” Turner said.
“he former drives strong demand for high-yielding FX, and the latter drives demand for oilexporting FX.”
Turner added that U.S. energy independence gives the dollar an additional tailwind if Iran succeeds in restricting Hormuz transit, “US energy independence will come back to the fore if Iran is effective in re-closing the Strait of Hormuz.”
Markets face a dense U.S. calendar this week that could reinforce the dollar’s footing. June CPI prints Tuesday, with headline inflation expected to fall month-on-month but core seen holding at 2.8-2.9% year-on-year, leaving the door open to further Federal Reserve tightening.
New Fed Chair Kevin Warsh begins two-day Congressional testimony Tuesday; ING describes his stance as likely opaque, though the Fed’s Beige Book on Wednesday and producer prices data will offer additional reads ahead of the July 29 FOMC meeting. “It looks too early for the market to price out a Fed rate hike this year,” Turner said.
Monday’s pullback in the pound is not driven by UK fundamentals. Domestically, political succession is orderly: Andy Burnham is set to be confirmed as Labour leader Friday and formally appointed prime minister next Monday.
Sterling’s resilience through recent political uncertainty suggests the transition is largely priced. The retreat below $1.34 reflects purely external forces, oil, the dollar, and risk sentiment, rather than any deterioration in the UK outlook.
Markets now price at least one Bank of England rate increase later this year, with a second possible, which limits the pound’s downside against the euro even as it slips against a dollar energised by geopolitical risk premia.
ING flags the EUR as particularly exposed given Europe’s dual vulnerability as both an energy importer and a low-yielder. inventories are low amid a regional heatwave, adding to medium-term cost pressures.
“EUR/USD can easily drift down to the 1.1360 area and could test the 1.1300/25 area this month,” Turner said, describing that zone as likely to prove the trading range floor for summer. ECB President Christine Lagarde meets Warsh in Washington Monday, though ING expects no policy signals to emerge.
grinds toward 101.50; retests 0.8140. To reverse the current dollar bid, Turner argues, energy prices would need to fall and the Fed would need to drop its tightening bias,”both of those seem unlikely in the near term.”