Pound Sterling edges lower as Iran war concerns revive USD demand; downside seems limited

The GBP/USD pair struggles to capitalize on the previous day's move higher and edges lower during the Asian session on Tuesday. Spot prices, however, manage to hold above the 1.3400 mark as investors await further developments surrounding the US-Israel-Iran war before placing fresh directional bets.

The US Dollar (USD) attracts fresh buyers following the previous day's pullback from over a three-month high and turns out to be a key factor acting as a headwind for the GBP/USD pair. Iran’s Islamic Revolutionary Guard Corps (IRGC) dismissed US President Donald Trump’s remarks that the war is close to ending and said that Tehran, not Washington, will determine when the war ends. This keeps geopolitical risks in play and revives demand for traditional safe-haven assets, including the USD.

Meanwhile, concerns about supply disruptions remain due to the closure of the Strait of Hormuz. This assists Crude Oil prices to regain positive traction following Monday's dramatic turnaround from the highest level since June 2022. Investors seem worried that the continuous rise in energy prices would rekindle inflation and delay rate cuts by the US Federal Reserve (Fed). This remains supportive of elevated US Treasury bond yields, which further benefits the Greenback and caps the GBP/USD pair.

The British Pound (GBP), however, draws support from the aggressive repricing of interest rate expectations. In fact, bets for three rate cuts by the Bank of England (BoE) have been replaced with a roughly 70% probability of a rate hike by year-end. This, in turn, could act as a tailwind for the GBP/USD pair, suggesting that any meaningful intraday slide could be seen as a buying opportunity. Traders now look forward to BoE Governor Andrew Bailey's speech on Thursday for a fresh impetus.

Apart from this, the US inflation figures – the Consumer Price Index (CPI) and the Personal Consumption Expenditure (PCE) Price Index – and the monthly UK GDP print scheduled this week would influence the GBP/USD pair. The focus, however, will remain glued to geopolitical developments, which will continue infusing some volatility in the financial markets and play a key role in influencing the USD price dynamics.