Sterling rose on Monday as an announced US-Iran accord improved risk appetite and pushed oil lower, reducing some demand for the Dollar as a geopolitical hedge. GBP was up 0.31%, and GBP/USD was trading at 1.3436 at the time of writing. The agreement is expected to be signed on Friday in Geneva, Switzerland, and includes ending the war and reopening the Strait of Hormuz.
The Pound also recorded a fresh 10-day high of 1.3460 as the Dollar weakened, although the pair remained within the past four weeks’ trading range. After minor losses the previous day, GBP/USD regained ground and traded around 1.3450 during Asian hours. Attention in the market has shifted towards monetary policy, which is helping to frame the near-term range in the currency pair.
Oil Prices and the Implications of the US-Iran Accord
With the US-Iran accord easing geopolitical tensions, we see the immediate drop in oil prices as the most significant factor for the coming weeks. We believe Brent crude will struggle to reclaim the $80 per barrel mark, as the deal could eventually reintroduce over one million barrels of Iranian oil per day to the market. Traders should consider positions that benefit from sustained lower energy prices.
Currency Reaction and Monetary Policy Outlook
The pound’s jump to 1.3436 against the dollar is primarily a reaction to the dollar weakening as a safe-haven asset. However, we doubt this rally has staying power, as the pair has been trapped in a range for the last month. We see this spike as a potential opportunity to sell into strength, as the focus will quickly shift away from geopolitics.
Looking ahead, monetary policy will drive the GBP/USD pair. With UK inflation last reported at a stubborn 2.3% and US inflation slightly lower at 2.1%, the Bank of England may be forced to hold interest rates higher for longer than the Federal Reserve. This policy difference should limit the pound’s upside and could pull the pair back towards the 1.3200 level.
The fall in energy prices acts as a global disinflationary pressure, which might give central banks more room to consider rate cuts later this year. Historically, the 2015 Iran nuclear deal was followed by a prolonged period of suppressed oil prices, which helped keep global inflation in check. We should anticipate a decline in market volatility, making strategies that profit from stable or falling volatility more appealing.
