– Written by


Frank Davies

STORY LINK Pound Sterling to Dollar Forecast: Middle East Tensions Push GBP Back Below 1.34

The Pound to Dollar exchange rate (GBP/USD) has slipped back to around 1.3380 as renewed Middle East tensions boosted demand for the safe-haven US Dollar.

Escalating military action between the US and Iran has lifted oil prices and increased concerns over global inflation, helping the Greenback recover while limiting Sterling’s ability to build on its recent gains.

GBP/USD Forecasts: Energy Fears Limit Pound Buying

The Pound to Dollar (GBP/USD) exchange rate has consolidated just above 1.3450 with markets monitoring domestic and international developments. Unease over the Middle East situation has helped underpin the dollar and curbed Pound buying while markets are waiting for key economic evidence.

Oil prices spiked higher in Asian trading on Monday amid further US strikes on Iran while there have been on-going Iranian attacks on shipping through the Strait of Hormuz.

According to UoB; “GBP has likely entered a range-trading phase between 1.3385 and 1.3495.”

Domestically, Andy Burnham has been confirmed as Prime Minister with an immediate focus on economic policy and the appointment of the next Chancellor.

The UK 10-year yield is just below the 5.00% level.

Scotiabank commented; “The greatest near-term risk lies with the UK’s fiscal outlook and Burnham’s plans around the prior government’s self-imposed fiscal rules.”

Nevertheless, the bank maintains a positive outlook on the Pound; “the latest pullback has revealed near-term resistance around 1.3550. We are bullish and note the potential for additional resistance closer to 1.3600. We look to a near-term range bound between 1.3420 and 1.3520.”

Overall interest in high-yield instruments has been sustained despite the Middle East situation.

MUFG commented on potential risks; “higher yields on offer in the UK come at a time when financial market conditions are supportive for carry trades given FX volatility is close to year-to-date lows. The recent rebound in energy prices and the correction lower for AI-related equities has not yet threatened current stable financial market conditions, although they are two obvious risks that could trigger an unwind of popular FX carry trades if they intensify further.”

ING expressed concerns over energy prices and expects firm dollar demand; “We are particularly focused on natural gas prices, which are now very close to their March highs again. And there is increasing focus on refined products, such as diesel, where higher prices can only add to fears of inflationary pressures being handed down global supply chains.”

According to the bank; “higher energy prices mean that the Fed will have to remain alert, and in this environment we struggle to see that any investors already owning dollars will be inclined to sell.”

MUFG added; “The renewed military strikes are disrupting energy supplies through the Strait of Hormuz. The IRGC Navy stated yesterday it had halted four unidentified vessels attempting to use an “unsafe route” after disregarding warnings. The unfavourable developments are leading to pick-up in global inflation risks and will put more pressure on central banks including the Fed to tighten policy this year.”

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The US Dollar to Yen exchange rate is trading around 162.66, close to July’s high of 162.84 and its strongest levels in decades.

The pair has gained from around 159.36 at the start of June, although it remains narrowly lower for July after briefly falling to 160.65 earlier this month.

ING believes USD/JPY could break above the 162.75-162.85 resistance area over the coming sessions as higher energy prices support the Dollar and increase pressure on Japan’s trade position.

Deteriorating news from the Gulf has pushed oil, natural gas and refined-product prices higher, reinforcing inflation concerns and reducing investors’ willingness to sell existing Dollar positions.

ING said it was “slightly surprising not to see the dollar a little stronger”, particularly as higher energy prices mean the Federal Reserve must remain alert to renewed inflation pressure.

Japan is particularly exposed to rising energy costs because it relies heavily on imported oil and gas. That backdrop can weaken the Yen while supporting currencies of energy exporters, including the US Dollar.

The bank also noted that Japanese authorities did not intervene during Monday’s Marine Day holiday, leaving traders free to test the upper end of the recent USD/JPY range.

According to ING, “it would not be a surprise to see USD/JPY briefly break above 162.75/85 over coming sessions” if the Bank of Japan remains absent from the market.

ING expects the broader Dollar index to find support near 100.50 and potentially recover towards 101.30, with persistent Gulf tensions and elevated energy prices limiting the scope for near-term Dollar weakness.

Foreign exchange analysts at Bank of America forecast the Euro to weaken against the US Dollar over the coming months, projecting EUR/USD will fall to 1.12 in the third quarter before recovering to 1.15 by the end of 2026.

The Euro to Dollar exchange rate (EUR/USD) traded around 1.15 on Monday after recovering from recent lows near 1.12, but remains below this year’s highs close to 1.20 as investors continue to favour the higher-yielding US Dollar.

The recent recovery in EUR/USD has come as the Dollar paused after a strong first half of the year. However, Bank of America believes the broader trend still favours the US currency, arguing that resilient US growth, relatively high Treasury yields and continued demand for Dollar-denominated assets should underpin the greenback.

The bank expects the Federal Reserve to remain more restrictive than many of its peers, preserving the Dollar’s yield advantage even if interest rates gradually move lower.

“We expect EUR/USD to finish 2026 at 1.15.”

BofA believes the path to that year-end forecast will not be smooth, with further Dollar strength likely over the coming months.

“Our forecasts are for EUR/USD at 1.12 by the end of the third quarter before recovering to 1.15 by year-end.”

The bank also points to the Eurozone’s weaker growth outlook and greater exposure to higher energy costs as factors that could continue to weigh on the single currency. Although investor positioning has become less negative on the Euro, BofA argues much of the earlier short-covering has already taken place, reducing scope for another sharp rally.

Looking further ahead, the outlook becomes more constructive for the Euro as the Dollar’s exceptional performance gradually fades.

“We forecast EUR/USD at 1.20 by end-2027 and 1.22 by end-2028.”

BofA believes that longer-term recovery will be driven by a gradual narrowing in growth and interest-rate differentials rather than by a sharp deterioration in the US economy.

Near-Term EUR/USD Forecast: BofA Sees Dollar Yield Advantage Limiting Euro Gains

Despite expecting EUR/USD to recover from its projected third-quarter lows, Bank of America believes the Dollar should remain well supported over the remainder of 2026.

“The Dollar’s yield advantage should continue to underpin the currency.”

For now, the bank expects rallies in EUR/USD to remain limited while US yields stay elevated and capital continues to flow into US assets. It argues that only a more pronounced slowdown in the US economy or a materially faster Federal Reserve easing cycle would be likely to push the pair sustainably above the mid-1.15 area.

The British Pound has been sideways in general against the yen on Monday, as we continue to see risk appetite cause some issues for a lot of assets. The pound continues to pay you at the end of every day to hold it here.

GBP/JPY

The British Pound has gone back and forth during the early part of the trading session here on Monday as we continue to see a lot of volatile trading in general. Keep in mind this is a pair that is highly sensitive to risk appetite, and therefore you have to be very realistic about what’s going on around the world. While we had recently seen the British Pound really take off against the Japanese Yen, recently we’ve seen a little bit of hesitation.

Interest Rate Differential Favors the Pound

The 216 Yen level looks to be support from what I can see, with the 220 Yen level above being resistance. Overall, I believe this is a market that will do everything it can to try to get to the upside as the interest rate differential continues to favor the British Pound. And of course, the Bank of Japan itself has a lot of issues when it comes to debt and the inflationary situation perhaps cooling off just a bit in the Japanese economy.

So, with that, I like the idea of finding dips every time we get them, taking advantage of them, and I have no interest in shorting. In fact, I’m quite comfortable adding to an already long position in little bits and pieces because you get paid at the end of every day. If we can break above the 220 Yen level, I think at that point we can really start to take off. But as things stand right now, I think more of a grind is probably to be expected.

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Christopher Lewis is a technical analyst and market commentator at DailyForex with more than two decades of trading experience in Forex and other leveraged markets. Based in Columbus, Ohio, he specializes in chart-based analysis of major currency pairs, stock indices, commodities, and energy markets, focusing on clear support and resistance levels, trend structure, and risk management. Christopher produces daily written and video analysis for traders who rely on technical setups to navigate volatile market conditions

As seen on: Pairs Of Aces Podcast,The Trader Guy, FXEmpire

Currency analysts at MUFG predict the Euro to recover ground against the Pound Sterling over the coming months, forecasting the Euro-Pound rate will strengthen to 0.8700 as Sterling’s recent rally fades and UK political optimism proves difficult to sustain.

The Euro to Pound exchange rate (EUR/GBP) traded close to 0.85 on Monday after falling to its lowest levels of 2026, leaving the Pound at its strongest against the Euro this year, but MUFG believes the move has gone too far.

The Pound has outperformed most major currencies this month after political developments in the UK boosted investor confidence. Reports that incoming Prime Minister Andy Burnham is likely to appoint a fiscally conservative Chancellor have also helped reduce concerns over the government’s economic direction.

MUFG believes those political tailwinds have been an important driver of Sterling’s gains, but questions whether they can continue.

“The pound has continued to trade at stronger levels after strengthening sharply in response to media reports surrounding the new government.”

The bank argues that markets have already priced in much of the near-term political optimism.

“We are cautious about chasing Sterling strength from current levels.”

MUFG also notes that the Euro has been weighed down by higher energy prices and concerns over the regional growth outlook following tensions in the Middle East. However, it expects those headwinds to fade gradually as markets refocus on relative valuations.

“The recent move in EUR/GBP looks overextended.”

While MUFG acknowledges that the Bank of England is likely to keep policy relatively restrictive in the near term, it believes expectations for UK growth and fiscal policy have become increasingly optimistic.

“Current market pricing leaves room for EUR/GBP to recover.”

Near-Term EUR/GBP Forecast: MUFG Sees Recovery Towards 0.8700

MUFG continues to forecast EUR/GBP rising to 0.8700, implying the Pound will surrender part of its recent gains against the Euro.

“We forecast EUR/GBP at 0.8700.”

The bank believes the combination of fading political optimism in the UK, stretched Sterling positioning and a stabilisation in the Eurozone outlook should allow the Euro to recover over the coming months. While the Pound could remain supported in the very near term, MUFG expects gains beyond current levels to prove increasingly difficult to sustain.