Pound-Dollar Recovery Already Fading as Oil Turns Higher
- Written by: Gary Howes
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A nascent GBP/USD recovery is being cut short by rejuvenated oil prices.
Brent crude rises 0.73% on Wednesday to hit $101.24 / barrel, putting it on course to record its highest daily close since the Iran crisis started.
The wild gyrations of the first week of March have given way to a steadier advance that speaks of a new normal of constrained supply thanks to Iran's blockage of the Strait of Hormuz.
The dollar retreated in the earlier part of the week as oil price volatility faded. "The rise in vessel traffic in the Strait of Hormuz may be modest, but mixed with the alternative pipelines from Iraq and Saudi Arabia, this means oil supply fears are lower," says Bob Savage, Head of Markets Macro Strategy at Bank of New York.
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Iran is allowing some crude through the Strait while Saudi Arabia is diverting oil via pipelines to Red Sea terminals. Iraq's Kirkuk fields to Turkey's Ceyhan port have resumed after Baghdad and the Kurdistan Regional Government agreed on Tuesday to restart pipeline flows.
Although oil price volatility has eased, the new normal is a market that remains undeniably tight and crude prices remain elevated and pointed higher.
Given this, USD weakness is likely to be shallow.
"USD strength is being supported by safe haven demand and repriced Fed expectations," says Savage.
GBP/USD fell to a low a 1.3218 last Friday before recovering through Monday and Tuesday to 1.3364. A new high at 1.3374 was reached on Wednesday before oil prices started to make renewed gains.
Price action speaks of an exchange rate that is highly sensitive to crude dynamics and is, technically, in a short-term downtrend:
Daily chart showing GBP/USD short-term downtrend.
For those watching the pair, the stance to hold is to be opportunistic on any rallies with a view that they will ultimately prove short-lived and prone to a resumption to fresh lows.
"More recently, USD has been the primary safe haven, as is often the case in geopolitically driven risk-off sentiment. The energy-based nature of risk aversion actually benefits the U.S. due to its net energy-exporting status," says Savage.
"While markets push out 2026 rate‑cut hopes, dollar's resilience should keep coming from a safe‑haven and terms‑of‑trade bid, meaning that the bar for a decisive USD downtrend is de‑escalation and visible normalisation of physical oil flows," says Kevin Ford, an analyst at Convera.
The next target for GBP/USD is last Friday's low at 1.3218, but we would likely need a fresh flare-up in the conflict to trigger such a move before the weekend.
"A further leg up for the Greenback hinges on a flare-up in energy prices and market volatility," says Ford.
