Middle East Conflict Heats Up USD, GBP Dragged Down
The GBP/USD pair attracted selling pressure and fell to around 1.3310 in early European trading on Wednesday (March 4), as rising geopolitical tensions in the Middle East triggered a flight to safe haven assets. In such risk-off conditions, the US dollar tends to benefit, while riskier currencies weaken relative to the greenback.
Market sentiment worsened after US President Donald Trump's statement calling the military operation "the last best chance" to curb the threat from Iran's ballistic missile and nuclear programs. Trump also indicated that the campaign could last four to five weeks, potentially even longer, so uncertainty is expected to remain high and support demand for the USD as a safe haven.
Meanwhile, Iran reportedly continued its retaliatory attacks on Israel and US targets in the region, prompting investors to reduce exposure to riskier assets. Consequently, GBP/USD struggled to build a recovery as the market preferred defensive currencies and liquid instruments amid increasingly aggressive geopolitical headlines.
The next focus will be on US data, particularly the ADP Employment and ISM Services PMI, which have the potential to provide clues to the dollar's short-term direction. If the data is strong, the market typically interprets the US economy as remaining solid, thus reinforcing expectations of prolonged high interest rates and providing further support for the USD.
However, the pound's weakness is not likely to be a complete "free fall." The surge in oil and gas prices due to the conflict has raised new inflation concerns, leading market participants to begin trimming expectations for further monetary policy easing by the Bank of England (BoE)—a factor that could help cushion pressure on the GBP.
Correspondingly, the probability of a BoE interest rate cut at its meeting later this month has reportedly dropped sharply compared to last week. This means that the GBP's potential for further weakening could be more limited if the market becomes more confident that the BoE will not aggressively ease policy, although the near-term direction of GBP/USD remains heavily influenced by a combination of geopolitical risk-off and US data. (alg)
Source: Newsmaker.id
