The British Pound edges lower against the US Dollar as cautious market sentiment surrounding US-Iran talks supports the Greenback. At the time of writing, GBP/USD is trading around 1.3429, remaining on the back foot for a second straight day.
Markets reacted to conflicting headlines surrounding US-Iran negotiations. Earlier in the day, Iran’s State TV initially reported that Tehran and Washington had prepared an initial unofficial framework for a memorandum of understanding (MOU).
However, the United States later rejected the Iranian media reports, calling the alleged interim peace deal draft “a complete fabrication.” Following the headlines, the US Dollar rebounded, reversing earlier intraday losses.
The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around the 99.20 mark after briefly slipping below 99.00 earlier in the European session.
Still, markets remain cautiously optimistic that a deal could eventually be reached as diplomatic talks between Washington and Tehran continue, despite lingering disagreements over Iran’s nuclear program and Tehran’s plans regarding control of the Strait of Hormuz. US President Donald Trump is holding a cabinet meeting on Wednesday to discuss the ongoing negotiations with Iran.
Until a final agreement is reached and the Strait of Hormuz fully reopens, Oil prices are likely to remain elevated, keeping inflation concerns in focus. The impact of higher Energy prices is already becoming visible in US inflation data, which has moved further away from the Federal Reserve’s 2% target since the Middle East conflict began.
This has reinforced expectations that the Fed may need to maintain a restrictive monetary policy stance for longer, with traders also pricing in the possibility of a rate hike by year-end, according to the CME FedWatch Tool.
In contrast, softer UK inflation and labor market data released earlier this month have led traders to dial back near-term Bank of England (BoE) rate hike bets after markets had previously priced in two to three rate increases by year-end, adding further pressure on the British Pound.
Traders now await upcoming US Personal Consumption Expenditures (PCE) inflation data and speeches from several Federal Reserve officials later this week for fresh clues on the interest rate path.
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