🎯 GBP/USD year-ahead forecast: Consensus targets from our survey of over 30 investment bank projections. Request your copy.

Image © Adobe Images

Relief in the pound-dollar exchange rate may extend in the near term, but analysts say the rebound is unlikely to last.

GBP/USD has recovered to 1.3466 on Tuesday as the U.S. dollar retreats alongside a pullback in energy prices.

Having fallen as low as 1.3253 last week, sterling has carved out a well-defined area of technical support as it has repeatedly failed to close below 1.3356 on a daily basis, a signal that sellers struggled to force the exchange rate lower despite the fog of war.

The recovery has also lifted GBP/USD above its nine-day moving average, indicating that short-term momentum has turned positive. Attention now turns to the next technical hurdle at the 21-day moving average near 1.35.

The rebound comes as the dollar gives back some of the gains accumulated during the recent Middle East energy shock.

Oil prices have fallen sharply after comments from U.S. President Donald Trump suggested the conflict with Iran may soon wind down and that steps could be taken to increase energy supply.

“Oil prices underwent their biggest slump on Monday since the pandemic era, before steadying above USD 90,” says a morning strategy note from Saxo Bank.

“The move that started with talks about a coordinated SPR release accelerated following comments from Trump, facing political backlash at home and abroad and growing concerns over fuel affordability, who said the Iran war could end soon,” adds Saxo.

The dollar has benefited from surging energy prices and safe-haven demand as the conflict in the Middle East escalated and Iran's retaliatory attacks targeted shipping in the Strait of Hormuz and energy infrastructure surrounding the Gulf.

That dynamic is now easing slightly, allowing currencies such as pound sterling to recover.

However, analysts caution that the current rebound in GBP/USD likely represents a temporary pause in the broader dollar-strength phase rather than the start of a sustained rally.

Chris Turner, head of FX analysis at ING Bank, says the dollar reversal is tied closely to developments in energy markets, "however, oil needs to start flowing again for this dollar reversal to extend.”

Trump said at a press conference overnight that the war with Iran could resolve “very soon” and that U.S. military objectives are “pretty well complete.”

Yet he also acknowledged that additional objectives remain and suggested the conflict may not end immediately.

Today, Israel and the U.S. continued airstrikes.

Iran says it's not seeking a truce and has continued its attacks on neighbours: the UAE says it is currently responding to a missile threat and Qatar says it intercepted a missile targeting the "State of Qatar." We've also seen reports of an explosion of an oil tanker near Abu Dhabi.

For currency markets, ING's Turner argues the key signal will be a restoration of normal energy supply routes. “What will matter most, though, is a reopening of the Strait of Hormuz and a restart of production across the Middle East.”

“Until investors receive headlines on that score, presumably relating to some kind of ceasefire, we doubt the dollar is going to quickly hand back all the gains made over the last two weeks,” he explains.

That outlook suggests GBP/USD may be able to test the 1.35 area in the near term, but any recovery is likely to prove fragile while energy markets and geopolitical tensions remain unresolved.