GBP/USD in Sharp Focus as Middle East Tensions, Fed, BoE All Come Into Focus

• GBP/USD at the mercy of Fed, BoE, and Israel-Iran headlines
• Oil’s surge revives dollar’s safe-haven credentials
• UK inflation cools, but is it enough to pressure for a dovish BoE tilt?
• Looking for actionable trade ideas to navigate market volatility? For a limited time, get access to InvestingPro’s AI-selected stock winners for under $7/month.

With both the Federal Reserve and Bank of England poised to deliver policy updates in the next 24 hours or so, one might expect central bankers to be the main attraction in markets. Not so. The real drama is unfolding on the geopolitical stage, where speculation is intensifying over a potential US military intervention in Iran.

Unsurprisingly, oil prices spiked once more yesterday, and with them, the US dollar found fresh safe-haven appeal. That put pressure on all major pairs, including the GBP/USD. This morning, though, oil prices eased slightly, paving the way for mild dollar selling. But the situation remains tense, keeping Brent oil steady near the $75 handle. For this reason, the risks for the GBP/USD remain tilted to the downside.

Before turning our focus to the central bank meetings, let’s take a look at the cable’s chart and discuss some levels that are coming into focus now.

GBP/USD Technical Analysis and Trade Ideas

The GBP/USD chart has now broken below the rising wedge pattern, which was always a prerequisite for downside momentum. The key question now is whether the cable will hold or break back below the pivotal level of 1.3430/35. This area was a major resistance zone in September 2024, before we finally broke above it in May this year.

Since then, rates have dipped back to test this level from above on a couple of occasions, including yesterday. The bulls have so far prevailed. However, a breakdown could trigger the unwinding of bullish bets and lead to some long-side liquidation. If that happens, the next support is seen around the 1.3400 area. Below that, the bullish trend line at 1.3450 will come into focus next.

Meanwhile, resistance is now seen in the range between 1.3515 to 1.3550 (shaded in orange on the chart). This area was the previous support and marks the underside of the broken short-term resistance trend. Above that, the recent high at 1.3632 will come into focus.

FOMC Rate Decision to Be Overshadowed by Middle East Tensions

As much as traders tune in for tonight’s Fed decision, it’s the chaos in the Middle East that’s truly driving sentiment. The dollar’s recent strength appears to be more a function of risk aversion than anything to do with Fed policy – the flight to safety being driven by crude prices lurching higher.

Israel’s renewed bombardment of Tehran has already ratcheted tensions, and talks of Washington’s involvement are adding fuel to the fire. Should those whispers become reality, we may well see oil extend its gains – and with it, the greenback.

Still, one must be cautious. The bounce in the US dollar index could easily be short-lived if oil’s ascent isn’t underpinned by genuine supply disruptions. Markets are running on headlines rather than fundamentals, and that makes for a fragile rally. Take yesterday’s tepid US retail sales figures – once the sort of print that would rattle FX markets, but now merely a sideshow. Geopolitics, it seems, has taken the wheel.

Turning back to the Fed, tonight’s decision will likely see rates left untouched, with the market laser-focused on the updated “dot plot” of rate projections.

I expect it to show policymakers still pencilling in 50 basis points of cuts this year. Oil’s resurgence, coupled with lingering concerns over tariff-led inflation, may convince the FOMC to strike a more hawkish tone. That alone could lend the dollar some staying power.

BoE Could Turn More Dovish

On the other side of the Atlantic, the pound faces its own challenges. UK CPI figures out this morning showed inflation slowing to 3.4% in May – a shade above expectations – while the core rate was in line at 3.5%, although still down from 3.8% the month before. More notably, services inflation slipped to 4.7%, undercutting forecasts. For a Bank of England that’s recently leaned hawkish, the data offer little support.

While a rate cut tomorrow remains highly unlikely, the pressure is clearly mounting for a more dovish stance. With economic indicators – from jobs to GDP – painting a softer picture, the BoE will struggle to maintain its tough talk unless inflation surprises to the upside again soon.

For GBP/USD, the next 24 hours promise plenty of volatility – but not necessarily clarity. Between central bank caution and headline-driven oil shocks, sterling’s upside is likely to remain subdued, with downside risks increasing.

***

If you’ve been on the hunt for professional-grade investing tools to take your investment strategy to the next level, here’s your chance.

For a very limited time only, you can get full access to InvestingPro - our all-in-one investing platform - for just under $7 a month using this link.

That means immediate access to insightful tools like:

Read my articles at City Index