The Pound to Dollar (GBP/USD) exchange rate has strengthened to 1.3416 (+0.1%), breaking above previous resistance levels as the dollar weakened following confirmation of a ceasefire between the United States and Iran.
The pair has moved decisively higher from the 1.32 area seen earlier in the week as markets unwind defensive dollar positioning.
According to UoB; “Momentum indicators are turning flat, and for the time being, we expect GBP to trade between 1.3160 and 1.3310.”
The move above this range reflects a sharp shift in market conditions following the easing of geopolitical tensions.
The Pentagon confirmed that attacks have stopped under a two-week ceasefire agreement, while the White House indicated that Israel has joined the framework.
The agreement, brokered with Pakistan’s involvement, has triggered a strong risk-on move across global markets.
Oil prices have fallen sharply, bond yields have declined and global equity markets have rallied, all of which have undermined safe-haven demand for the dollar.
Earlier in the week, markets had been braced for a binary outcome ahead of a US deadline on Iran, with expectations that any escalation would trigger a sharp dollar rally.
According to Rabobank; “today is ‘Bridge Day’, but will it be a day for burning bridges, or building them?”
Instead, the ceasefire has shifted sentiment decisively towards a more constructive outcome, although uncertainty over its durability remains.
MUFG had noted the limited volatility ahead of the deadline; “The FX market continues to trade in relatively narrow trading ranges and there is limited evidence of any pick-up in volatility at this stage.”
It added; “If Trump follows through on his threats, we would expect to see a broad-based increase in volatility and with that some strengthening of the US dollar.”
That scenario has, for now, been avoided, with markets instead pricing in a reduction in geopolitical risk.
ING had also warned; “No one knows whether the deadline is another bout of maximalist pressure from the White House, but until there is news of a ceasefire, or perhaps a prolonged postponement of the current deadline, the dollar is likely to stay bid.”
With a ceasefire now in place, this support for the dollar has faded.
Even so, markets remain cautious over the longer-term outlook.
Commerzbank head of FX and commodity research Thu Lan Nguyen commented; “The Iranian leadership has demonstrated, surprisingly to many it seems, that it can exercise full control over the Strait.”
She added; “And it is already becoming apparent that Iran intends to utilise this control for its long-term interests.”
According to BNY; “Markets are beginning to focus on the risks to growth, as much as to inflation, from demand destruction.”
In this context, underlying monetary policy expectations will remain an important driver.
Scotiabank commented; “the Fed is further from tightening policy than many of its key peers at this point and spreads continue to move—in broad terms—against the USD suggesting that once geo-political tensions ease, the USD is liable to ease unless inflation risks evaporate quickly as well.”
The latest de-escalation has triggered a sharp GBP/USD rebound, although markets will remain highly sensitive to any signs that the ceasefire is breaking down.
