British Pound Remains Subdued As US-Iran Tensions Lift US Dollar

• GBP/USD declines as the US Dollar rises on increased safe-haven demand.

• US-Iran military escalation has sparked conflicting declarations from Washington and Tehran over whether the strategic strait remains open.

• Expected BoE rate hikes by late 2026 should support the British Pound and limit the GBP/USD pair's downside.

GBP/USD remains in negative territory after paring daily losses, trading around 1.3390 during the early European hours on Monday. The pair faces challenges as the US Dollar (USD) gains ground on rising safe-haven demand amid intensifying tensions in the Middle East.

US Central Command (CENTCOM) launched additional airstrikes on Sunday evening, following striking more than 300 Iranian targets over a three-night span, including 140 on Saturday. The purpose is to neutralize Iran's capability to target civilian vessels navigating critical waterways. This military escalation has left Washington and Tehran issuing conflicting declarations regarding whether the strategic strait remains open to maritime traffic.

The US Dollar also receives support as higher oil prices stoke fresh fears of inflation and a prolonged Federal Reserve (Fed) high-interest-rate environment. Investors are now turning their attention to Tuesday's US Consumer Price Index (CPI) data for clearer signals on the Federal Reserve's policy outlook. June's headline CPI is projected to decline by 0.1% month-on-month, while core CPI is expected to rise by 0.3% over the same period.

Traders anticipate one more Fed interest rate hike before the year concludes; monetary policy remains a critical market driver. Consequently, all eyes will be on Fed Chair Kevin Warsh this Tuesday as he makes his highly anticipated first official appearance before the US Congress.

However, the downside of the GBP/USD pair could be restrained as the Pound Sterling (GBP) may receive support from traders’ expectations of at least one 25-basis-point (bps) interest rate hike from the Bank of England by the end of 2026.

On the political front, market anxieties over leadership stability have eased following news that former Greater Manchester mayor Andy Burnham has secured overwhelming support from Labour MPs to succeed Keir Starmer as Prime Minister.