This Monday, Sterling was navigating the intricacies of recovery versus a mere reprieve. The GBP/USD was sitting at the same level as the 200-day Exponential Moving Average (EMA) at the start of the week. It reached around the 1.3400 mark during Asian trading, but since then, has been sold off steadily. Currently, it’s trading at 1.3349, hovering around the 1.3350 mark as the session unfolds.
The challenges aren’t exclusive to the pound—it’s more of a broad shift. The dollar is gaining traction across the major currencies, largely influenced by two significant developments that occurred close together. The first is related to turning a crucial oil passage into a toll point. The second stems from the Federal Reserve officials, who previously promoted lower rates but are now hinting at possible increases.
Cover charge imposed on Strait of Hormuz
On Monday, President Trump declared that the U.S. would re-establish its blockade on Iran. This means re-blocking the Strait of Hormuz and implementing a ban on Iranian vessels while other ships would need to pay a 20% transit fee to navigate through, turning this vital corridor into a revenue source. This decision comes just days after a ceasefire was disrupted by renewed U.S. strikes and Iran’s response to commercial shipping.
The nuances of this situation are intriguing. There’s a clear contradiction at play, as while a toll was announced, Iran previously asserted that no tolls would be imposed on international waterways. Tariffs are being drafted, crude oil contracts are being reassessed, and the dollar is seeing an influx of refuge flows.
Pigeon rediscovers claws
In another vein, a well-known Fed director, typically viewed as a dovish figure, indicated that monetary policy is at a pivotal point during a speech in New York. He’s pointing towards the upcoming inflation report as potentially decisive, suggesting that a rate hike could be on the horizon—a notable shift from advocating for cuts just a year earlier. He noted that the job market is stabilizing while price pressures are ramping up.
Interest rate futures reacted swiftly to this. A quarter-point hike by September is becoming increasingly likely, with approximately a 75% chance that the target will exceed the current 3.50% to 3.75% range by then. There’s also a notable possibility—over 40%—that the July 29 meeting could bring a decision on this front, with projected outcomes indicating a rise of 0.5 points by December.
Interestingly, this repricing doesn’t rely on the Straits remaining blocked. A toll at Hormuz could lead to inflationary consequences, but it’s doubtful that the committee would adjust forecasts based on maritime situations.
Next week: June inflation arrives before expiration
The dollar’s fate will be almost immediately judged with Tuesday’s release of the June consumer price index (CPI) at 12:30 GMT. The consensus anticipates a 0.1% decline from the previous month, bringing the annual rate down to 3.8% from 4.2%. Core measures are expected to remain unchanged at 0.2% month-on-month and 2.9% year-over-year. This looks deflationary, which is precisely what those bearish on the dollar might hope for.
However, the timing is crucial. These figures come before discussions about a notable 20% tax on a significant portion of the world’s offshore oil, making the upcoming data an echo of a past reality. Hawkish officials are clearly tying rate discussions to critical indicators, so robust core figures can have greater impacts than softer general news. Following this, the Fed chair will commence two days of Congressional testimony at 2pm GMT, providing a platform for leadership to interpret these figures.
Sterling’s forthcoming reports are less immediate. The Bank of England governor will speak at 20:00 GMT on Tuesday and previously indicated that interest rate cuts are not on the table, especially with the energy crisis impacting household finances. Meanwhile, UK growth and production figures for May will be released at 6:00 GMT on Thursday, with expectations for a 0.1% month-on-month gain following April’s contraction. Additionally, preliminary U.S. retail sales data will round out a week that had put the dollar under scrutiny.
Technical level and bias
Resistance: Key resistance is found at 1.3400, reinforced by the 200-day and 50-day EMAs between current levels and recent figures. The rejection on Monday peaked just above this resistance. Beyond that, 1.3450 represents the high from last week’s recovery phase.
Support: Current bids are uncertain at 1.3350, with trading slightly down. If this support level fails, the next impact level to watch will be 1.3300. Losing that could put the July recovery back into question.
Bias: The outlook is low. The recent rejection has reached trend resistance, with indicators suggesting a decline. The dollar exhibits a mixed interest, serving as both a safe haven and reactive to price differentials. The CPI results are likely to be seen as outdated rather than beneficial. A sustained break below 1.3350 could trigger a fall to 1.3300, while a bounce back to 1.3400 may continue to be subjected to selling pressures until conditions change.
