Pound-Dollar Pointed Lower This Week

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Risk is heavily skewed lower, even if we're seeing GBP/USD put up a decent fight at a key technical support level.

The dollar is in demand again on Monday after oil prices surged amidst signs that Donald Trump has a higher pain threshold to the spike than investors had expected and Iran chose a hardliner as its new supreme leader.

Oil prices spiked and the dollar was bid earlier in Monday's session as markets digested Trump's comments that "short term oil prices, which will drop rapidly when the destruction of the Iran nuclear threat is over, is a very small price to pay for U.S.A., and World, Safety and Peace."

Iran meanwhile appointed Mojtaba Khamenei, son of the slain former supreme leader, as the new supreme leader.

"The appointment of Mojtaba Khamenei as Iran’s new supreme leader significantly complicates the strategic outlook, increasing the probability of a more intense, and possibly prolonged, conflict," says Edoardo Campanella, Director and Chief Editor of The Investment Institute at UniCredit Bank.

Brent crude went to as high as $13/barrel Monday before gains were pared by news that G7 countries were to consider releasing strategic reserves to cool prices.

That paring in the oil prices assisted GBP/USD in recovering from earlier lows at 1.3283 to 1.3409.

"Crude prices shot up by more than a quarter as trading got underway on oil markets. It’s been the biggest jump since the outbreak of the pandemic, and investors are bracing for an inflation crisis," says Susannah Streeter, Chief Investment Strategist at Wealth Club.

European gas prices gained as much as 30% to reach €69.50 per megawatt hour when trading opened on Monday. Prices have more than doubled since the crisis began.

Higher energy prices and the liquidation of investments into cash inevitably help the dollar.

Interestingly, though, GBP seems able to withstand USD gains better than other peers; for example, GBP/USD was down 0.57% last week, EUR/USD was down 1.70% last week.

Sterling resilience is likely due to the rapid hawkish repricing in UK interest rate expectations. The market saw near on three rate cuts for 2026 at one stage two weeks ago and now, there's a hike baked into the curve.

"Markets have moved to price out rate cuts - the Bank of England is all but certain to leave rates on hold according to swaps markets. In fact markets are now pricing in a roughly 70% chance the BoE hikes this year," says Neil Wilson, analyst at Saxo Bank.

That's a significant repricing in bets in a pro-GBP direction that few other G10 currencies have experienced.

Above: Rate expectations have lifted sharply over recent weeks.

Technicals also show significant support for GBP/USD at 1.3356 with the pair not closing below here on a daily basis last week.

Sure, we're below here again on Monday, but downside is not easy to realise in GBP/USD with the next support zone at 1.3253.

So for the week ahead, further downside is expected, but sterling's resilience can limit the losses.

Risks are two-way: all it will take are reports pointing towards a roadmap to a ceasefire for oil to drop, which will weigh on the USD.

The big downside risk is a capitulation in stock markets which would indicate a major risk-off sentiment event. This can be particularly damaging to GBP/USD and would outweigh the supportive repricing in UK rate expectations.