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GBP/USD's relief rally hits resistance as Middle East tensions keep the dollar supported.

Pound-dollar retreats to 1.34 midweek as a relief-style rally from the floor around 1.33 encounters resistance.

The USD is finding a renewed bid alongside oil amidst rising concerns the U.S. has not credible plan to restart maritime traiffic through the Strait of Hormuz, which means the global energy supply shock could last longer than feared.

"On the Strait of Hormuz, they had NO PLAN. I can't go into more detail about how Iran gums up the Strait, but suffice it say, right now, they don't know how to get it safely back open," said U.S. Senator Chris Murphy following a briefing he attended with security officials.

This, he added this is "unforgivable, because this part of the disaster was 100% foreseeable."

Oil prices are 3.0% higher on the day, and the USD is now up across the board, pushing GBP/USD down to 1.34.

The GBP/USD rebound ran into a ceiling near the 21-day moving average (MA) at 1.3480 on Tuesday and sterling then pared some of its gains to go back to 1.3416, which is what we envisioned might happen in yesterday's GBP/USD report.

The dollar's resilience is still the central driver of GBP/USD action, and the ongoing conflict in the Gulf is doing enough to ensure USD weakness is limited.

Although oil prices are well off their highs, they're still elevated: traders continue to navigate a volatile barrage of headlines regarding the Middle East and the Strait of Hormuz.

The Strait is the choke point for energy supplies and it's firmly shut, with Iranian threats of mining the transit way holding oil prices. A shuttered Strait is enough to steady the dollar and keep GBP/USD's relief rally in check.

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On the other side of the ledger are reports of a massive coordinated release of oil reserves and U.S. efforts to sink Iranian mining boats and gain decisive control of the strait.

"The IEA is reportedly proposing the largest ever oil stockpile release, which may keep oil volatility capped for now, despite offering only a temporary solution to the supply glut. This remains a headline-toheadline trading environment with all focus on assessing the length of the Iran conflict," says a morning note from ING.

USD losses will be limited until it's clear the U.S. feels it's done enough to contain Iran and guarantee safe passage of shipping through the Strait.

Pound-dollar upside potential will be crimped until those objectives have been met.

Yet, at the same time, no one had a stronger pound sterling on their bingo cards heading into the conflict.

That support for the British currency arises from the sharp uplift in Bank of England rate expectations, as rising oil and gas prices will likely be particularly noticeable in the UK.

Remember, the Bank of England hadn't succeeded in returning inflation back to the 2.0% target heading into the war, and core inflation stays resolutely stubborn.

It means the Bank will have to be particularly alert to another inflationary pulse, meaning rate rises are more likely than rate reductions at this point in time.

In the U.S. money markets show investors raised expectations for the outlook of Fed interest rates by 25 basis points since the conflict got underway. In Britain, by contrast, the money market curve shows up to 80bp have been added.

That is a sizeable skew in favour of GBP/USD and could mean the exchange rate recovers rapidly when the fog of war lifts.