Sterling came under pressure on Thursday as a resurgent dollar and renewed U.S.-Iran military friction knocked down hopes for a prompt resolution in the Strait of Hormuz. As of 05:20 ET (09:20 GMT), GBP/USD was down 0.16% at 1.3405, while EUR/USD slipped 0.09% to 1.1616.
The immediate geopolitical environment deteriorated overnight. U.S. forces struck a military site near Bandar Abbas, and Iran's Islamic Revolutionary Guard Corps mounted a retaliatory attack on a U.S. air base, describing its action as a "serious warning." At the same time, U.S. President Donald Trump rejected any sanction relief or asset releases for Tehran, a stance that undercut tentative optimism about a deal reached on Wednesday and helped to ignite a broad-based bid for the dollar.
Market commentary captured the change in tone. ING's Francesco Pesole said that foreign exchange markets are once again operating in a "headline-to-headline environment," where political and military developments drive immediate flows.
The dollar's renewed firmness cannot be ascribed to geopolitics alone. Hot U.S. inflation readings earlier in May have materially altered market expectations for Federal Reserve policy. ING points out that, whereas in mid-April Brent at current $95-97/bbl levels implied 5-10 basis points of year-end easing, markets have now shifted to price 18 basis points of tightening. That revaluation creates a macro floor for the dollar, narrowing the scope for sustained declines even when deal optimism surfaces.
For the pound in particular, domestic political drivers that had supported sterling through mid-May have largely unwound, according to ING. A political risk premium that built around speculation over Prime Minister Keir Starmer's leadership reached roughly 1% in EUR/GBP terms on May 15 and has since been compressed back to zero. ING attributes part of that erosion to frontrunner Andy Burnham embracing a market-friendly fiscal stance and pledging to leave the existing borrowing framework intact.
With the immediate prospect of a leadership challenge pushed out - ING notes that the most plausible window has drifted toward September - sterling finds itself more exposed to global forces and the dollar narrative. The Bank of England's path toward disinflation also faces complications from the rise in crude, which ING estimates has climbed more than 50% since the conflict began. That development leaves the pound with limited structural support from the domestic side.
Economic releases due during the session could still influence flows. The highlight is April's personal consumption expenditures (PCE) data, scheduled later on Thursday. ING forecasts core PCE at 0.3% month-on-month, which sits below the 0.5% consensus; a softer print could modestly trim dollar support but is not expected to trigger a significant dovish repricing. Market participants will also parse the April European Central Bank minutes, which are expected to underline the case for a rate increase at the June 11 meeting - though with roughly 21 basis points already priced in, the euro's reaction may be limited. ECB President Christine Lagarde is among a number of speakers on the calendar.
Looking at technical thresholds, ING continues to identify EUR/USD support in the 1.1580-1.1590 area, but cautions that those levels may not hold if the U.S.-Iran stalemate escalates further, noting a 1.150 test as a live risk in that circumstance.
Implications for markets
- FX markets have returned to being driven by headlines and geopolitical developments.
- Commodity-linked pressures, notably a sizable rise in crude, complicate the outlook for central bank disinflation narratives.
- Short-term moves in sterling now look more correlated with external U.S. dollar dynamics than with domestic political developments.
This report focuses on market reactions to geopolitical and macro signals and does not attempt to forecast political outcomes or to ascribe causes beyond the events and data described above.