Pound-Dollar Recovery Fails as Oil Aims for New Highs
- Written by: Gary Howes
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GBP/USD is down on the day on a rejuvenated oil price rally.
Brent crude rises 5.0% on Wednesday to hit $106 / barrel, putting it on course to record its highest daily close since the Iran crisis started.
Gains followed news Iran's Pars gas field was hit on Wednesday in the first reported strikes on Iranian energy infrastructure in the Gulf during the U.S.-Israeli war.
The attack amounts to a major escalation in the conflict and Iran has warned neighbouring states to evacuate their energy installations.
Pars is the Iranian sector of the world's largest natural gas deposit, which Iran shares with Qatar.
"USD strength is being supported by safe haven demand and repriced Fed expectations," says strategist Bob Savage at Bank of New York.
GBP/USD fell to a low a 1.3218 last Friday before recovering through Monday and Tuesday to 1.3364. A new high at 1.3374 was reached on Wednesday before oil prices started to make renewed gains.
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"Dollar resilience should keep coming from a safe‑haven and terms‑of‑trade bid, meaning that the bar for a decisive USD downtrend is de‑escalation and visible normalisation of physical oil flows," says Kevin Ford, an analyst at Convera.
"A further leg up for the Greenback hinges on a flare-up in energy prices and market volatility," he adds.
The market's reaction to the Pars attack confirms traders are nervous of another spike in market volatility as Iran exercises its only real leverage: the ability to attack energy infrastructure and restrict shipping through the Strait of Hormuz.
Today's price action in pound-dollar speaks of an exchange rate that is highly sensitive to crude dynamics and is, technically, in a short-term downtrend:
Daily chart showing GBP/USD short-term downtrend.
For those watching the pair, the stance to hold is to be opportunistic on any rallies with a view that they will ultimately prove short-lived and prone to a resumption to fresh lows.
"More recently, USD has been the primary safe haven, as is often the case in geopolitically driven risk-off sentiment. The energy-based nature of risk aversion actually benefits the U.S. due to its net energy-exporting status," says Savage.
