Pound Keeps Dollar at Bay On Hopes for Talks Breakthrough

Vice President Vance will lead the U.S. in talks in Pakistan. File image: Gage Skidmore.

The British pound successfully defended a key level against the dollar amidst ongoing hopes for a full resolution to the Iran war.

Pound-dollar retreated to interim support at 1.3480 on Monday and Tuesday and on both occasions found solid buying interest that keeps it afloat in the 1.3480-1.36 range.

Price action suggests the dollar's finding limited demand in an environment of cautious optimism that Iran and the U.S. will soon make further progress to a durable peace agreement.

"Despite a bumpy opening of markets this week, investors are still positioned for a near-term resolution of the Middle East conflict, and overnight headlines seem to offer new hope again," says Michiel Tukker, Senior UK & Eurozone Rates Strategist at ING Bank.

The dollar rallied in the early stages of the war, but soon reversed direction as it became clear the tempo of the early stages of the conflict wouldn't persist.

Iran on Tuesday indicated it will attend negotiations in Pakistan after days of confusion as to whether it would send a delegation to Islamabad

The U.S. is believed to be ready to negotiate: Vice President JD Vance will leave for Pakistan to participate in negotiations that are set to begin "either Tuesday night or Wednesday morning," Trump said in an interview Monday.

"There's going to be a meeting. They want a meeting, and they should want a meeting. And it can work out well," said Trump in the interview.

He added that he won't allow Iranian shipping through the Strait of Hormuz "until a deal is signed."

The Wall Street Journal quotes a White House official as saying President Trump is not inclined to extend the cease-fire beyond Wednesday evening, when it expires.

Markets are reading right through that headline as pre-negotiation jockeying: WTI crude oil prices declined by about 1% to $86 / barrel and Brent retreated a similar amount and is back at $94 / barrel.

In fact, the recent negative headlines of recent days (ships ceased, threats to walk away from negotiations, etc.) have been interpreted by traders as pre-talk positioning, and this is why FX markets are relatively becalmed on Tuesday.

"The decline in oil prices comes amid optimism that the war in the Middle East cannot be sustained much longer, even as the risk of renewed escalation rises," says Samer Hasn, Senior Market Analyst at XS.com.

The dollar will likely come under pressure again on any signs of a breakthrough in upcoming talks.

Until then, we expect the pound-dollar exchange rate will stick to the 1.36-1.3480 range.