Investing.com — Sterling traded with a softer tone, down 0.1% at 1.3392 as of 03:38 ET (07:38 GMT) on Thursday, as the dollar regained some ground following signs that the Iran ceasefire may be fragile, tempering the previous session’s risk-on rally.
The pound’s earlier gains, driven by improved risk sentiment and a broad dollar sell-off, came under pressure after Iran indicated that the ceasefire had been violated.
While headlines around peace negotiations and the reopening of the Strait of Hormuz continue to support markets, uncertainty over the truce’s durability has reintroduced caution.
The shift in sentiment has slowed momentum in high-beta currencies, which had outperformed earlier in the week amid expectations of lower volatility and stable energy prices.
Sterling, which tends to track global risk appetite, remains sensitive to further geopolitical developments.
ING strategist Chris Turner said the preference for higher-beta currencies could persist if the de-escalation narrative holds, though intermittent setbacks may continue to trigger bouts of dollar strength.
On the policy side, minutes from the Federal Reserve showed a mildly hawkish shift, with markets now pricing only around 7 basis points of easing by year-end, down from roughly 15bp earlier.
Officials highlighted two-sided risks linked to the conflict, noting that faster rate cuts could be considered if labour market conditions weaken more sharply.
Meanwhile, euro moves appeared more resilient. Despite a broader preference for higher-beta currencies, sticky rate expectations from the European Central Bank are providing underlying support.
Markets continue to price close to 50-60bp of tightening by year-end, which may help remain supported near the 1.1700-1.1730 area in the near term.
In the UK, faces relative downside risks versus the euro. The Bank of England is seen as more likely to shift dovish, particularly if energy prices continue to ease.
With policymakers previously leaning toward rate cuts even before the conflict, markets could trim expectations further in coming weeks, especially with upcoming commentary from Governor Andrew Bailey and other officials.
Across Central and Eastern Europe, currencies have continued to recover losses triggered by the conflict, supported by improving sentiment.
The Polish zloty has rebounded strongly, although further gains may depend more on geopolitical stability than domestic factors. The National Bank of Poland is expected to keep rates unchanged, reinforcing expectations of a prolonged pause in policy.
