Pound Stuck in Geopolitical Crosswinds Ahead of Fed and BoE Decisions
As the currency markets tread cautiously, Pound exhibiting muted movements, heavily influenced by escalating Middle East tensions and upcoming central bank decisions. Investors are avoiding bold positions amid uncertainty surrounding potential military escalations and shifts in global monetary policy, with both the Euro and the Pound reflecting this cautious sentiment.
Middle East Conflict Supports USD’s Safe-Haven Status
Continued hostilities between Israel and Iran have subdued risk sentiment globally. The fifth consecutive day of missile exchanges has added to fears of a wider conflict, especially after US President Donald Trump cut short his participation in the G7 summit to hold an emergency meeting with the National Security Council. His warning for US citizens to leave Tehran has raised alarm over possible US involvement in the region.
Such geopolitical uncertainty typically boosts the US Dollar due to its safe-haven appeal. However, the Dollar’s rally remains subdued so far, possibly due to investor caution ahead of the Federal Reserve’s highly anticipated policy meeting on Wednesday.
Fed in Focus: Markets Eye Dot Plot and Economic Projections
Markets expect the Fed to hold interest rates steady in the 4.25%-4.50% range, but traders will be closely watching the Summary of Economic Projections and the dot plot, which maps out rate expectations of individual policymakers. In March, Fed officials signaled two rate cuts by the end of 2025. Whether that stance shifts in light of geopolitical uncertainty and weakening US macro data is key.
A surprising drop in the NY Fed Manufacturing Index (-16 in June vs. -5.5 expected) and expectations of a 0.7% decline in May retail sales suggest a slowdown in US economic activity, potentially bolstering the case for a more dovish Fed outlook.
Eurozone Data Fails to Impress as Sentiment Hinges on Risk Aversion
In Europe, attention was briefly on the ZEW Economic Sentiment Survey, which is expected to show a minor improvement in June. However, any economic optimism in the Eurozone is being overshadowed by geopolitical fears and dollar strength. The Euro’s performance today shows limited gains against major peers, with weakness evident versus the Swiss Franc and New Zealand Dollar.
British Pound Under Pressure Amid Geopolitical Risks and Soft Domestic Outlook
The British Pound has underperformed against major currencies, falling toward 1.3545 against the US Dollar on Tuesday. The ongoing geopolitical risks combined with soft domestic economic indicators and policy uncertainty are weighing heavily on GBPUSD.
Israel-Iran Conflict Dampens Risk Appetite and Hits GBP
Similar to the Euro, the Pound is suffering from deteriorating risk sentiment. Reports of Iran asking regional peers to pressure the US into brokering a ceasefire, and Trump tasking Vice President JD Vance with outreach, illustrate the seriousness of the situation. Missile attacks reported by the Israeli military are heightening global unease.
This environment favors the US Dollar, particularly against risk-sensitive currencies like the Pound. However, the Dollar’s rally has been capped, likely due to pre-Fed indecision.
UK Data Watch: CPI and BoE Take Center Stage
Market participants are eyeing Wednesday’s release of UK Consumer Price Index (CPI) data for May. Inflation is expected to have moderated, which could justify the Bank of England’s (BoE) cautious stance. The central bank is scheduled to announce its monetary policy decision on Thursday and is widely expected to maintain its base rate at 4.25%.
Despite a recent 25bps rate cut, BoE policymakers continue to signal a gradual and careful easing path. However, cracks in the UK labor market—rising unemployment and slower hiring—are fueling speculation that the BoE might revisit its guidance sooner than expected.
CME Tool Shows Steady Fed; BoE Faces More Complex Outlook
According to the CME FedWatch Tool, there is near-unanimous expectation that the Fed will keep rates unchanged. The key market-moving elements will be the forward-looking aspects of the Fed’s release: the dot plot, inflation forecasts, and Chair Jerome Powell’s press conference.
In contrast, the BoE’s path appears less certain. While steady rates are expected, the growing slack in the labor market may compel policymakers to reassess the balance between inflation control and economic stability.
Currency Heat Maps Reveal Pound Underperformance
The daily currency performance tables show clear weakness in the British Pound across the board:
- GBP is down 0.36% against the New Zealand Dollar and 0.27% versus the Canadian Dollar.
- The Pound is also under pressure against the Euro (-0.12%) and Swiss Franc (-0.33%).
- In contrast, the Euro has shown relative stability, trading flat or modestly lower versus the USD and other peers.
These figures highlight a market that is punishing the Pound more harshly than the Euro, reflecting a greater degree of uncertainty surrounding the UK outlook.
Technical Picture: Consolidation Patterns in Both Pairs
EURUSD remains trapped within a tight triangular consolidation near 1.1550. This suggests a breakout may be imminent, with the Fed decision likely to provide the catalyst.
GBPUSD, on the other hand, has broken down from its short-term support levels, now eyeing the 1.3500 psychological support. A weaker-than-expected CPI or a dovish BoE tone could see the pair test lower levels in coming sessions.
Short-Term Scenarios and Trading Outlook
EURUSD: Key Resistance and Support Levels
- Support: 1.1500, then 1.1450
- Resistance: 1.1580, then 1.1620
- A hawkish Fed tone could see EUR/USD retreat toward 1.1450, while dovish signals might push it above 1.1600.
GBPUSD: Key Resistance and Support Levels
- Support: 1.3500, then 1.3450
- Resistance: 1.3580, then 1.3625
- Pound weakness could deepen if inflation data disappoints or if BoE sounds more cautious than expected.
Conclusion: Currencies in Holding Pattern as Headlines Dominate
Both EURUSD and GBPUSD are in holding patterns, caught between geopolitical risks and central bank crosscurrents. The Fed’s decision on Wednesday will provide the first major directional signal, with the BoE and UK inflation data set to add more weight to GBP movements.
In the broader picture, Middle East tensions remain a wild card. If the conflict escalates further or if the US gets involved militarily, risk aversion could dominate markets, lifting the US Dollar and putting further pressure on both the Euro and the Pound.
