The Pound: From Outsider to Favourite

The Pound: From Outsider to Favourite

• Rumours of a less profligate Treasury than expected have boosted GBPUSD.
• The US dollar is falling as the likelihood of monetary tightening by the Fed has diminished.

The US dollar is no longer finding support from oil. Brent is trading near monthly highs, while the USD index continues to fall. Investors are in no hurry to buy the greenback as a safe-haven ticket amid the escalation in the Middle East. The US President’s threats may well be part of his negotiating strategy. Instead, the markets are following the old playbook on geopolitics. 

At the start of the US-Iran standoff, the dollar enjoyed increased demand as the rally in Brent crude accelerated inflation and raised the chance of a Fed Rate hike. Later, in April, the USD index fell as investors concluded that oil would be unable to reclaim its March highs. This implied that inflation would soon peak. 

Something similar is happening in July. The month-on-month decline in consumer and producer prices is leading investors to believe that inflation peaked in May. If so, there is no need for the Fed to tighten monetary policy. This reduces the likelihood of a rate hike and causes the US dollar to retreat.

Other currencies are capitalising on its weakness. For instance, the British pound has been the best-performing G10 currency over the past month, thanks to reduced political risk. The incoming Prime Minister, Andy Burnham, is set to stick to the old rules of fiscal consolidation. Meanwhile, rumours that he will appoint a less spendthrift Chancellor than expected have driven GBPUSD to its highest level since early May. 

Divergences in monetary policy are also supporting sterling. The futures market is pricing in a lower probability of aggressive monetary tightening by the Fed, simultaneously signalling confidence in two hikes by the Bank of England in 2026. The first of these could take place in September.   

Meanwhile, Japan appears to have found a stronger hand for the yen than threats of currency intervention or rumours of a tightening of the BoJ’s monetary policy. USDJPY has remained range-bound following a statement by Satsuki Katayama. The finance minister announced that she would take measures to encourage the GPIF to purchase domestic assets.

The FxPro Analyst Team