The US Dollar Index (DXY) traded near 99.35 during Asian trading hours on Thursday, edging higher amid escalating conflict in the Middle East [1]. The GBP/USD pair touched a fresh weekly low around 1.3370 before recovering slightly to 1.3400, down less than 0.15% for the day [2]. The rise in the US Dollar is attributed to a global flight to safety as tensions intensify, with Iran launching its 'most intense operation since the beginning of the war' and targeting fuel tanks in Bahrain, while two foreign tankers were hit in Iraqi waters, causing fires and oil leaks [1][2]. Iran's Islamic Revolutionary Guard Corps (IRGC) reportedly conducted a joint operation with Lebanon's Hezbollah against targets in Israel, Jordan, and Saudi Arabia, following intense US-Israeli bombardments on Iran [2].
Reports of attacks on tankers in the northern Persian Gulf near Iraq and Kuwait have triggered a fresh leg up in Crude Oil prices, threatening the inflation outlook and supporting a further rise in US Treasury bond yields, which provides additional support to the USD [2]. However, the US Consumer Price Index (CPI) released Wednesday showed moderate price growth, with headline CPI rising 0.3% MoM in February (vs. 0.2% prior) and core CPI increasing 0.2% MoM (vs. 0.3% prior), both in line with expectations [1][2]. Annual CPI inflation rates remained unchanged from January, indicating inflation is holding above the Federal Reserve’s 2% target but not worsening [1]. Markets are pricing in a 99.5% chance that the Fed will leave interest rates unchanged at its March policy meeting, according to the CME FedWatch tool [1].
On the UK side, repricing of Bank of England (BoE) interest rate expectations has limited aggressive bearish bets on the British Pound. Bets for three rate cuts by the BoE have been replaced with a greater probability of a rate hike by the end of the year, contributing to limiting losses for the GBP/USD pair [2]. Traders are awaiting BoE Governor Andrew Bailey's speech, the monthly UK GDP print, and the US Personal Consumption Expenditure (PCE) Price Index on Friday for further market direction [2].
Both articles highlight that ongoing geopolitical tensions in the Middle East are driving volatility and influencing central bank policy outlooks, with the focus remaining on developments in the region and their impact on inflation and financial markets [1][2].
CONCLUSION
Escalating Middle East tensions have boosted the US Dollar and pressured the GBP/USD pair, with safe-haven flows and rising oil prices supporting the USD. While US inflation data remains moderate and the Fed is expected to keep rates unchanged, shifting BoE rate expectations are limiting losses for the Pound. Market volatility is expected to persist as traders monitor geopolitical developments and upcoming central bank communications.