Sterling and the euro climbed on Monday following news of a preliminary U.S.-Iran ceasefire framework that lifted market risk appetite and sent oil prices down sharply. At 08:32 ET (12:32 GMT), GBP/USD was trading 0.14% higher at 1.3425, while EUR/USD had risen 0.39% to 1.1611.
The dollar lost ground broadly as investors priced in the prospect of Iranian oil returning to global markets and the potential reopening of the Strait of Hormuz, a development that would ease near-term inflationary pressures tied to energy. The U.S.-Iran framework, according to the reporting, is scheduled to be formally signed in Switzerland on Friday and would lift the U.S. blockade, restoring Iranian oil exports to international markets.
Brent crude slipped sharply on the ceasefire news. ING strategist Chris Turner cautioned, however, that "the bigger reaction could come at the short end of yield curves, where central banks have had to clear up the inflationary mess left by the energy spike in April and May." Turner added that, with the MSCI World Index already 5% higher than pre-war levels, "risk assets might not need to travel too far on today’s welcome news."
Market participants also assessed the euro's gains with some restraint. ING described the rally in the common currency as "less than impressive," noting it was "not clear that it needs to trade above 1.1650 today." This comes ahead of a busy schedule of European Central Bank speakers through the week after last week's policy decision.
Following the ECB's recent rate increase, officials including the ECB President and Executive Board members are due to appear throughout the week. Markets currently assign only a 16% probability to a July ECB hike, providing the central bank room to keep options open. ECB Executive Board member Nagel is quoted as saying that the recovery in oil supply would take months, implying that meaningful inflation relief will be delayed.
Sterling faces several near-term risks of its own. ING highlighted "a few sterling risks this week," pointing to the Bank of England's policy meeting on Thursday, where the bank is widely expected to hold its policy rate at 3.75%. Markets have pushed out expectations for the BoE's next hike to November. ING noted that lower energy prices raise the question of "whether the BoE needs to hike at all," leaving Governor Andrew Bailey to balance risks carefully.
Political risk in the U.K. is also on traders' radars. The Makerfield by-election on Thursday could influence sterling if Labour candidate Andy Burnham were to win, a result ING said "would formally fire the starting pistol on the Labour leadership contest and likely weigh on sterling."
On the U.S. policy front, attention turns to Wednesday's Federal Open Market Committee meeting, the first with Kevin Warsh as Fed Chair. ING suggested this event will likely cap further dollar weakness. The DXY index was noted as having outside risk toward the 99.00/99.15 area. Turner observed that Warsh "will have to talk tough on inflation to avoid upsetting the long end of the bond market."
From a technical perspective, EUR/GBP is reported to hold strong support in the 0.8610/15 area. For the pound-dollar cross, resistance is identified near 1.3450/1.3500, while support holds around 1.3350.
Market context
- Currency moves were driven by renewed hopes for an easing in oil supply constraints and by a busy central bank calendar.
- Energy markets reacted immediately, while central bank communications and political events remain potential sources of volatility for currencies and bond markets.