Sterling edged higher against the dollar in North American trade on Wednesday, with GBP\/USD at 1.3371, up 0.09%, as tensions intensified after the US said talks with Iran were \u201cover\u201d following exchanges of attacks. Iran struck two vessels transiting the Strait of Hormuz, prompting a US response, and US CENTCOM said it hit 80 targets over the past two days. Washington also reimposed sanctions on Iran\u2019s oil, while crude rose; WTI climbed nearly 5% to $75.60. The dollar index was up 0.10% at 101.19, supported by firmer oil.<\/p>\n
Attention turns to June FOMC minutes, the first under chair Kevin Warsh, while money markets assign a 94% probability of at least one Fed rate increase in 2026. For July, pricing implies a 65% chance of rates being held, according to Prime Terminal data, with initial jobless claims due for the week ending 4 July. In UK politics, uncertainty over Andy Burnham\u2019s prospective chancellor choice persists, while Polymarkets puts the chance of Ed Miliband taking the role at 51%. Bank of England deputy governor Sarah Breeden is also due to speak.<\/p>\n
With tensions flaring in the Strait of Hormuz, through which about 21% of global petroleum liquids pass, we expect market volatility to remain high. The CBOE Volatility Index (VIX), a key measure of market fear, has already jumped to 22.5 from a low of 14 just last week. We believe traders should consider buying options to protect against, or profit from, further sharp price swings in the coming weeks.<\/p>\n
The immediate shock has sent West Texas Intermediate crude oil surging to $75.60 a barrel, supporting the US dollar as a safe-haven asset. Historically, such geopolitical oil shocks create sustained upward pressure on energy prices and the dollar. We see continued opportunity in long crude oil futures or call options on energy sector ETFs, as a prolonged conflict could push prices toward the $85-$90 range seen during previous supply disruptions.<\/p>\n
This situation creates a difficult choice for the Federal Reserve, weighing inflationary pressure from oil against the risk of an economic slowdown. While markets are still pricing a 94% chance of one more rate hike this year, the odds of a pause in July have firmed up considerably. We anticipate this uncertainty will lead to more activity in interest rate derivatives as traders speculate on the Fed’s next move.<\/p>\n
For the British pound, the combination of a strong dollar and domestic political uncertainty presents a clear headwind. With the potential for a left-leaning finance minister unsettling investors, the GBP\/USD pair looks vulnerable below the key technical resistance around 1.3400. We feel that buying put options on GBP\/USD is a prudent strategy to position for a potential decline toward the 1.3159 support level.<\/p>\n\n\n\n