GBP/USD holds gains despite dollar strength as rate divergence narrows

GBP/USD trades around 1.3420, near its highest level since late February, holding onto strong weekly gains even as the dollar finds support from geopolitical and inflationary pressures. The pair remains resilient despite rising US inflation expectations, which are likely to delay Federal Reserve rate cuts. The crucial US CPI report is forecast to show a March increase driven by higher crude oil prices, reinforcing the Fed’s cautious stance on monetary easing.

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US Dollar Index Erases Annual Gains as Middle East Ceasefire Reprices Energy Risk

The US Dollar Index dropped 1.2% on Wednesday, erasing all of its year-to-date gains. The euro, pound sterling, and yen each rose more than 1% against the dollar during trading. The decline was driven by a two-week ceasefire announced between the US and Iran, which caused Brent crude oil futures to plummet 16%. This retreat in energy prices reduced the US dollar's status as a safe-haven asset and prompted leveraged investors to unwind long dollar positions. The drop in oil prices also reignited market expectations for Federal Reserve interest rate cuts, with current pricing indicating a 33% probability of one rate cut within the year. The US dollar rebounded 0.6% from its daily low after Iran suspended tanker passage through the Strait of Hormuz on the 8th.

Geopolitical tensions have escalated in the Strait of Hormuz, where Iran halted shipping traffic in response to Israeli attacks on Lebanon. The disruption has lifted crude oil prices, while comments from US President Donald Trump—accusing Iran of mismanaging oil flows and threatening renewed strikes—have further underpinned dollar demand. Yet, the Pound has held firm, reflecting shifting market pricing on UK monetary policy.

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foreign exchange

Geopolitical Risk, Not Oil, Is Now the Ringgit’s Anchor

The ringgit strengthened to 3.98 against the US dollar this week, but gains are stalling — not because of domestic weakness, but because global risk sentiment is still tethered to Middle East volatility. Lower oil prices should be helping the ringgit: Brent crude retreated, easing input costs and improving Malaysia’s trade balance. When oil falls, import bills shrink and inflation pressure cools — a classic tailwind for emerging market currencies. Yet the ringgit isn’t capitalizing. Renewed Israeli strikes in Lebanon have shattered confidence in a durable ceasefire, keeping oil prices elevated on geopolitical risk alone. That risk premium is now the dominant force, outweighing any fundamental relief from lower production costs. Investors aren’t buying the rally. They see the reprieve as temporary. At the same time, the US dollar is firming on strong domestic data — a 4.3% unemployment rate and solid payroll growth — reinforcing the Federal Reserve’s higher-for-longer rate stance. That makes dollar assets more attractive, pulling capital from currencies like the ringgit. Defensive positioning ahead of diplomatic talks in Islamabad only deepens the caution. Kenanga expects the currency to trade between 4.00 and 4.05 in the near term. Technicals show resistance at 4.01 and support at 3.96, but range-bound action is likely until there’s concrete progress on de-escalation. Until then, markets won’t take aggressive long positions. Sustained volatility in Strait of Hormuz-linked energy prices remains a direct threat to Malaysia’s inflation and fiscal outlook — a reminder that for small, open economies, the fate of the currency often hinges not on what happens at home, but on what happens far beyond its shores.

Traders now expect 30-40 basis points of Bank of England rate hikes by year-end, a significant shift from earlier expectations. This contrasts with the Fed’s projected path of one rate cut by the end of 2024 and another in 2027. The growing policy divergence favors GBP/USD bulls, limiting downside even in a strong dollar environment. The pair is poised to close the week with solid gains despite a lack of follow-through selling during Friday’s Asian session.

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foreign exchange

US Dollar Index Erases Annual Gains as Middle East Ceasefire Reprices Energy Risk

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foreign exchange

Geopolitical Risk, Not Oil, Is Now the Ringgit’s Anchor

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