On Monday (August 24) during the Asian session, the British pound continued its strong performance against the US dollar, trading around 1.3650, marking its fourth consecutive day of gains and remaining near its highest level since February 11, reached last Friday. The US dollar was under overall pressure – expectations of a Fed rate hike continued to cool, and US Treasury yields fell, driven by the Treasury's expanded repurchase program, both weighing on the dollar. However, escalating geopolitical tensions between the US and Iran provided safe-haven buying support for the dollar. The secretary of Iran's Supreme National Security Council warned that if the economic war continued, oil exports from the Strait of Hormuz and the entire Persian Gulf would be halted, and any country participating in US sanctions would be considered a declaration of war against Iran. Inflation risks (stemming from volatile energy prices) kept expectations of at least one rate hike before the end of the year on the table, limiting the pound's upside potential.

The dollar remained under pressure, while the pound approached its highest level since February.

The pound remained strong against the dollar in Asian trading, trading around 1.3650, marking its fourth consecutive day of gains. The dollar struggled to mount a meaningful rebound, hovering near three-month lows, providing upward momentum for the pound. Markets continued to reduce bets on a September rate hike by the Federal Reserve as price pressures showed signs of easing. The US Treasury's announcement last Wednesday that it would at least double the size of its long-term debt buyback program starting in September triggered a decline in Treasury yields, further pressuring the dollar.

Geopolitical risks provide a floor for the US dollar

However, the downside potential of the US dollar may be limited by geopolitical risks. US Treasury Secretary Bessenter is scheduled to announce the "toughest sanctions in history" against Iran on Monday. Iran's Supreme National Security Council Secretary Rezaei responded by stating that if the economic war continues, Iran will halt all oil exports from the Strait of Hormuz and the entire Persian Gulf, and warned that any country participating in US sanctions will be considered to have declared war on Iran. This statement perpetuates the geopolitical risk premium, providing support for the safe-haven dollar and limiting the upside potential of the pound.

Inflation Risks and This Week's Focus: PCE Data and Jackson Hole

Inflation risks stemming from energy price volatility keep expectations of at least one rate hike before the end of the year on the table, potentially limiting aggressive short-selling of the dollar in the short term. Market focus is now shifting to Wednesday's release of the US PCE price index—the Fed's preferred inflation gauge—and Friday's speech by Fed Chairman Warsh in Jackson Hole. Investors will be looking for further clues about the Fed's policy path, which will determine the dollar's short-term direction and provide new directional momentum for the pound against the dollar.

Summarize

The British pound strengthened for the fourth consecutive trading day against the US dollar, currently trading around 1.3650. The dollar was pressured by easing expectations of a Fed rate hike and falling US Treasury yields, but geopolitical tensions between the US and Iran provided safe-haven buying support for the dollar, limiting the pound's upside. Iran's threat to halt Gulf oil exports and its view of participating countries in sanctions as a declaration of war maintains a geopolitical risk premium. Inflation risks stemming from energy price volatility keep expectations of a year-end rate hike on the table. Market focus shifts to this week's PCE data and the Jackson Hole speech, with 1.3660 being a key short-term resistance level. (GBP/USD daily chart, source: FX678) At 10:31 Beijing time on August 24, GBP/USD was trading at 1.3649/50.