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The British Pound retains its uptrend against the Dollar.
Conflict in the Middle East has not yet had a material impact on the Pound to Dollar exchange rate (GBP/USD), which leaves the technical setup still pointing higher at the start of the new week.
To be sure, it's hard to see the exchange rate hitting new highs with Israel and Iran hammering each other, ensuring the risk of a major escalation is particularly elevated. Last Friday's USD buying showed there is still a place for the USD in a setup where geopolitical risks are rising.
However, the GBP/USD has recovered from lows at 1.3515, reached on Friday, and is back at 1.3566 at the time of writing on Monday. This resilience is telling, confirming the exchange rate retains a firm uptrend amidst a broader USD selloff.
Despite the Middle East conflict, GBP/USD retains a hold above the nine-day exponential moving average, currently located at 1.3546, with recent dips below this line being short-lived, confirming the favoured trend for the near term is to the upside.
Given this resilience, the Week Ahead Forecast model looks for a move to 1.36 in the coming days, and potentially a retest of the 2025 high at 1.3631 at some point later in the week.
Trendwise, we suspect a sideways move is more likely than a clear break to fresh highs in the week ahead, but this is something that could happen if Israel and Iran de-escalate.
Risks of a mistake by Iran, which draws the U.S. into the conflict, are one potential risk that would boost oil prices and the Dollar. There are also worries that Iran will try to disrupt shipping in the Strait of Hormuz.
Above: GBP/USD at daily intervals.
"The USD can still benefit from safe‑haven demand during external shocks. In our view, the escalation of the conflict between Israel and Iran could lead market participants to anticipate a weaker global economy, thereby supporting the USD," says Samara Hammoud, FX Strategist at Commonwealth Bank.
This is going to be a busy week for GBP/USD central bank-wise, as the currency faces the Federal Reserve interest rate meeting on Wednesday and the Bank of England on Thursday.
"We expect the FOMC will have the bigger impact on interest rate expectations and therefore GBP/USD. If the FOMC removes a cut from their ‘dot plot’, GBP/USD can fall towards support at 1.3270 (76.4% fibbo). The BoE is widely expected to leave the bank rate unchanged at 4.25%. We expect the BoE to continue to emphasise that interest rates will be normalised at a gradual pace," says Hammoud.
The Federal Reserve has little scope to move, with various Fed speakers warning that June is too soon to cut interest rates, leaving markets geared for a move later in the year, with money market pricing favouring a Q4 cut.
"Investors will pay close attention to the post-announcement statement and Q&A session for signals on the Fed’s near-term policy stance," says Ricardo Evangelista, Senior Analyst at ActivTrades. "Any shift in expectations, which currently point to a 25 basis point cut in September, followed by a similar move before year-end, could influence the performance of the US dollar."
The Bank of England decision on Thursday won't result in another interest rate cut, but expect policy makers to address the recent set of soft employment figures and GDP numbers, potentially signposting an August rate cut in the process.
The market raised the odds of an August rate cut following last week's labour market and GDP numbers, which mechanically weighed on domestic bond yields and the Pound.
However, an adjustment in expectations is now arguably fully 'in the price' of the Pound, and for this reason, we don't think the moves post-BoE will be massive. Indeed, last week's adjustment in rate expectations hardly dented GBP/USD, leaving a broader uptrend intact.