The GBP/USD pair advanced to around 1.3355 during the early European trading session on Tuesday, with the British pound strengthening against the US dollar as investors increased expectations that the Bank of England could raise interest rates later this year to keep inflation under control.
Market sentiment toward the pound improved after policymakers signaled that inflation risks remain elevated, prompting traders to reassess the outlook for UK monetary policy.
However, escalating geopolitical tensions in the Middle East continued to support demand for the US dollar as a traditional safe-haven asset, limiting gains for the currency pair.
BoE rate hike expectations boost sterling
The British pound found support as traders ramped up bets that the Bank of England will be forced to tighten monetary policy before the end of the year in an effort to contain inflationary pressures.
The shift in expectations came after renewed tensions in the Middle East pushed oil prices higher following a decline to pre-conflict levels over the past month.
Higher energy prices have renewed concerns that inflation could remain elevated.
BoE Chief Economist Huw Pill signaled that interest rates are likely to rise this year to prevent inflation from becoming entrenched.
Following those remarks, futures markets shifted their focus to the September and November policy meetings as the most likely opportunities for the UK central bank to increase borrowing costs.
According to Morningstar, while markets are increasingly pricing in the possibility of a rate hike, the probability of such a move remains below 50%.
Middle East conflict underpins demand for the US dollar
Despite sterling’s gains, renewed geopolitical uncertainty continued to provide support for the US dollar.
Earlier, US President Donald Trump said the United States would ensure the Strait of Hormuz remains open and would charge a 20% fee.
On Tuesday, the United States carried out additional attacks on Iran.
Iranian media reported explosions on Kish and Qeshm islands, as well as in Bushehr and Bandar Abbas.
Iran’s military said it attacked US military sites in Kuwait, Bahrain, and Jordan, along with two oil supertankers in the Strait of Hormuz.
The escalating conflict has increased investor demand for safe-haven assets, which could strengthen the greenback and act as a headwind for the GBP/USD pair.
Focus shifts to US inflation data and Fed testimony
Investors are now awaiting the release of the US June Consumer Price Index (CPI) inflation report later on Tuesday, which could provide fresh guidance on the outlook for US monetary policy.
A softer-than-expected inflation reading could weaken expectations for further US interest rate hikes, putting pressure on the US dollar and providing additional support for the GBP/USD pair.
Market participants will also closely monitor congressional testimony from Federal Reserve official Kevin Warsh for further signals on the US central bank’s policy outlook.
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