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British Pound strengthens above 1.3350 ahead of US CPI data

  • GBP/USD gathers strength to near 1.3360 in Tuesday’s Asian session. 
  • Renewed US strikes on Iran and fears over Strait of Hormuz shipping might cap the upside for the pair. 
  • BoE’s Pill said interest rates are likely to rise to keep inflation in check. 

The GBP/USD pair trades in positive territory around 1.3360 during the Asian trading hours on Tuesday. However, the potential upside for the major pair might be limited amid fears of an escalating US-Iran conflict. The US June Consumer Price Index (CPI) inflation report will take center stage later on Tuesday. 

US President Donald Trump said on Monday that Washington was reinstating a naval blockade on Tehran and would ensure the Strait of Hormuz remained open for a fee following fresh exchanges of missile and drone strikes, per Reuters. The US military said that US forces completed new strikes on Iranian military targets, adding that more than 50,000 US service members are currently deployed across the Middle East. 

Meanwhile, the Iranian Islamic Revolutionary Guards Corps (IRGC) said on Tuesday that cooperation with the ‘aggressor enemy’ in the Strait of Hormuz will delay the reopening of the waterway and create a global energy crisis. Concerns over escalating tensions between the US and Iran could boost a safe-haven currency such as the US Dollar (USD) and cap the upside for the GBP/USD pair. 

Traders ramped up bets that the Bank of England (BoE) will be forced to raise interest rates this year to keep inflation under control. BoE Chief Economist Huw Pill said that interest rates are likely to rise this year to prevent inflation from becoming entrenched. 

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United States Dollar Index declines despite rising safe-haven demand, Fed rate hike odds

  • US Dollar Index may regain ground as escalating Middle East tensions drive safe-haven demand.
  • CENTCOM announced precision strikes on Iranian targets, noting over 50,000 US service members are deployed across the Middle East.
  • The CME FedWatch Tool shows a 51% chance of a September Fed rate hike versus a 23% hold probability.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is losing ground after two days of gains and is trading around 101.20 during the Asian session on Tuesday.

However, the downside of the Greenback could be limited amid rising safe-haven demand due to escalating Middle East tensions. US Central Command (CENTCOM) announced new precision strikes on Iranian military targets, noting that over 50,000 US service members are currently deployed across the Middle East. Meanwhile, Iran’s IRGC stated that two “offending supertankers” were disabled in the Strait of Hormuz after ignoring warnings and using a mined route. Iran warned that cooperating with the US would delay the waterway’s reopening and trigger a global energy crisis.

Hormuz tensions drive oil prices higher, stoking fears that energy-driven inflation will force the Federal Reserve (Fed) to keep interest rates elevated. Market expectations have shifted rapidly in response, with the CME FedWatch Tool now showing a 51% probability of a Fed rate hike in September, compared to just a 23% chance that rates will stay on hold.

Traders await Tuesday’s US June Consumer Price Index (CPI) report, where analysts anticipate a divergence between a 0.1% month-on-month decline in headline inflation and a sticky 0.3% increase in the core reading.

Also, Federal Reserve Chair Kevin Warsh will deliver highly anticipated congressional testimony, a session that traders will dissect word by word for hints on whether the central bank will validate the market’s growing hawkishness.

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South Korean Won Nears 2-Month High

The South Korean won strengthened to around 1,490 per dollar, extending gains toward its highest level since mid-May, as investors increasingly priced in a Bank of Korea interest rate hike later this week. Persistent inflation, resilient economic growth, and elevated household debt reinforced the case for the central bank’s first rate increase in more than three years, supporting the local currency. The won also drew support from anticipated foreign exchange inflows, with SK Hynix expected to convert part of the proceeds from its $26.5 billion US listing into won for domestic investment, increasing dollar supply in the local foreign exchange market. Meanwhile, investors remained cautious as they monitored heightened Middle East tensions after the US reinstated a blockade of Iranian ports and President Donald Trump announced a 20% charge on cargo passing through the Strait of Hormuz, fueling concerns over higher energy costs, lifting oil prices, and supporting demand for the US dollar.

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Euro Drops Near One-Year Low on Middle East Tensions

The euro opened the week at $1.14, nearing its one-year low from June, as investors responded to escalating Middle East tensions. Oil prices surged after another round of US strikes on Iran, with both sides disputing the status of the Strait of Hormuz. The US Central Command reported striking dozens of targets to weaken Iran’s ability to threaten shipping in the waterway. Iran, however, announced on Sunday that the strait would remain closed “until further notice.” The uncertainty fueled inflation concerns, leading investors to bet on further European Central Bank interest rate hikes. The ECB had already raised rates in June for the first time since 2023. Now, markets expect two additional hikes over the next year, with the first likely in September, to counter inflation driven by rising fuel costs tied to the Iran conflict. ECB policymaker Yannis Stournaras warned on Friday that the central bank is “back to square one” in its battle against high inflation in the eurozone.

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Pound Slips as Middle East Tensions Weigh on Markets

The pound fell back below $1.34, retreating from three-week highs, as investors reacted to rising Middle East tensions. Oil prices surged following another wave of US strikes on Iran, with both sides clashing over the status of the Strait of Hormuz. The US Central Command confirmed strikes on dozens of targets to curb Iran’s ability to threaten shipping in the region, while Iran declared the strait would remain closed “until further notice.” The resulting uncertainty amplified inflation concerns, prompting investors to increase bets on further Bank of England interest rate hikes. Markets now anticipate at least one rate increase later this year, with a possibility of a second. Politically, Andy Burnham is set to become the new Labour party leader when the leadership contest ends on Friday and is expected to be officially appointed as prime minister next Monday. Sterling’s resilience amid recent political turmoil suggests much of the negative news has already been factored in.

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Rupee Falls to Over Four-Week Low

The Indian rupee weakened to 95.7 per dollar, retreating from recent gains to its lowest level in over four weeks, as renewed tensions in the Middle East sent crude oil prices sharply higher. Sentiment deteriorated amid renewed concerns over India’s trade balance after Iran expanded its attacks to Qatar and the UAE following fresh US strikes on Iran. US President Donald Trump declared that the ceasefire was over, fueling fears of further supply disruptions. Brent crude surged more than 4% to $79.28 per barrel, increasing pressure on the rupee. Investors also monitored the Reserve Bank of India’s response, with market participants expecting the central bank to continue supporting the currency through dollar sales as higher oil prices threaten to fuel inflation. Meanwhile, traders closely watched the impact of rising oil-driven inflation concerns on US Treasury yields as markets assessed the implications of the latest strikes and counter-strikes on global energy supplies.

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Offshore Yuan Slips on Stronger Dollar

The offshore yuan weakened to around 6.78 per dollar on Monday, retreating from a near three-week high reached in the previous session as escalating tensions in the Middle East boosted demand for safe-haven assets. The US dollar strengthened as surging oil prices revived expectations that the Federal Reserve may need to keep monetary policy tighter for longer, following a weekend of intensified clashes between the US and Iran and continued uncertainty over shipping through the Strait of Hormuz. However, the yuan’s losses were partly tempered by the People’s Bank of China’s midpoint fixing of 6.7972 per dollar, its strongest since February 10, 2023, although it was set 122 pips weaker than Reuters’ estimate. Investors are now awaiting a raft of key Chinese economic data due later this week, including trade figures, Q2 GDP, industrial production, retail sales, and unemployment data.

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Canadian Dollar edges lower as US launches new wave of strikes against Iran

  • USD/CAD drifts higher to around 1.4165 in Monday’s Asian session. 
  • The US launched a new wave of strikes against Iran aimed at ‘degrading’ the military. 
  • The BoC is likely to hold the rate steady on Wednesday. 

The USD/CAD pair gains traction to near 1.4165, snapping the four-day losing streak during the Asian trading hours on Monday. The US Dollar (USD) strengthens against the Canadian Dollar (CAD) amid lingering tensions regarding the US-Iran conflict. The US June Consumer Price Index (CPI) inflation report will be the highlight later on Tuesday. 

The US military carried out multiple attacks across Iran, saying they were aimed at “degrading” Tehran’s ability to disrupt commercial vessels in the Strait of Hormuz, per Bloomberg. The Islamic Revolutionary Guard Corps (IRGC) then launched retaliatory drone and missile assaults on US allies across the Middle East, including Kuwait, Jordan, Qatar, Bahrain, and Jordan. 

Over the weekend, Iran stated that the Strait of Hormuz would now be closed “until further notice.” Signs of escalating tensions in the Middle East could boost a safe-haven currency such as the Greenback against the CAD in the near term.

On the other hand, a stronger-than-expected Canadian jobs report could provide some support to the Loonie. Data released by Statistics Canada on Friday showed that Canada’s economy added 18.2K jobs in June, continuing the momentum in the job market seen the month before. This figure followed a rise of 87.8K in May and was above the market consensus of 10K. The Unemployment Rate fell to 6.5% in June from 6.6% in May, better than the expectation of 6.6%. 

The Bank of Canada (BoC) is anticipated to hold its overnight rate at 2.25% at its July policy meeting on Wednesday and keep it there well into next year as price pressures remain largely contained and the economy gradually recovers, a Reuters poll showed.