Pound to Dollar Forecast: Middle East Conflict Continues to Boost USD Demand

Modified: Thursday, 23 July 2026 22:31 BST - Written by Frank Davies

STORY LINK Pound to Dollar Forecast: Middle East Conflict Continues to Boost USD Demand

The Pound to Dollar exchange rate (GBP/USD) has fallen to around 1.3380 after recovering modestly from recent lows, although Sterling remains under pressure as elevated energy prices and renewed geopolitical tensions continue to underpin the US Dollar.

Concerns over the UK's fiscal outlook and fragile gilt market sentiment have also limited demand for the Pound.

GBP/USD Forecasts: Break Below 1.3350

The Pound to Dollar (GBP/USD) exchange rate came under renewed pressure on Thursday as surging energy prices supported the US currency and concerns over UK fiscal policy continued to undermine Sterling.

GBP/USD broke below the 1.3350 support area and traded around 1.3320 during the evening session, down 0.42% on the day.

The pair has now retreated more than two cents from last week’s two-month highs above 1.3550.

Higher oil prices have continued to underpin the Dollar, while fiscal concerns have weighed on the Pound and contributed to further upward pressure on UK bond yields.

The UK 10-year gilt yield traded around 5.05%, with investors remaining uneasy over the government’s early spending and tax announcements.

The latest UK inflation data had little sustained impact, with Middle East tensions, energy prices and fiscal policy continuing to dominate Sterling sentiment.

Ahead of Thursday’s losses, UoB commented; “The rapid increase in downward momentum suggests GBP could continue to decline. However, last week’s low, near 1.3340, is expected to provide firm support.”

That support subsequently gave way as GBP/USD extended its decline below 1.3340.

Scotiabank had also identified the 50-day moving average at 1.3371 as an important near-term level.

The bank commented; “The 50 day MA (1.3371) appears to be offering near-term support and we look to a near-term range bound between 1.3320 and 1.3420.”

With GBP/USD now testing the bottom of that range, a sustained break below 1.3320 would increase the risk of a further decline towards 1.3200.

Bank of America sees the potential for larger losses; “GBP risk premium is moving higher and, in an environment where the geopolitical backdrop remains fragile, we think GBP/USD is vulnerable to a move towards $1.32.”

Rabobank takes a similar view; “We see scope for dips in cable back to the GBP/USD 1.32 area on a three-month view.”

The United States has continued to attack Iranian targets, while Iran and its regional allies have launched further attacks against US and regional facilities.

Oil prices increased sharply on Thursday, with Brent crude surging above $100 per barrel for the first time since May.

Attacks on Saudi oil tankers in the Red Sea and tighter Iranian control over shipping through the Strait of Hormuz intensified fears of disruption to global energy supplies.

The latest increase in oil prices reinforced inflation concerns, pushed global bond yields higher and strengthened demand for the Dollar.

According to Scotiabank; “With President Trump downplaying the idea of peace talks the Gulf region may remain a factor for markets for some time to come.”

MUFG commented; “The US dollar gained against most G10 currencies yesterday with a focus on the continued deterioration in the Middle East and the diminishing prospects that a hoped-for 10-day ceasefire would become reality.”

ING noted that investors had been gravitating towards currencies that provide attractive yields and protection against a further increase in energy prices.

The bank commented; “Given the quiet summer markets, investors continue to gravitate towards currencies that will deliver yield as well as offer some protection against even higher energy prices should the conflict broaden further in the Gulf.”

Although relatively high UK yields could offer Sterling some protection, the Pound has been unable to benefit while confidence in the domestic bond market remains fragile.

UK Fiscal Concerns Continue to Weigh on Pound Sterling

Markets continued to scrutinise UK fiscal policy as Prime Minister Andy Burnham announced a series of measures intended to reduce household and business costs.

The government has removed VAT from domestic electricity bills, restored the £2 cap on many bus fares and announced a 20% business-rates cut for pubs, clubs and live music venues.

Ministers have identified funding sources for the policies, but investors remain concerned over whether the projected savings and additional revenue will be sufficient.

Scotiabank noted; “In politics, PM Burnham’s fiscal plans are still being formed and previous pronouncements are being walked back, such as lifting income tax thresholds, as the government seeks to maintain confidence in its commitment to responsibility.”

According to Commerzbank’s Thu Lan Nguyen; “Markets are focused on his plans to cut the cost of living via tax relief and more social housing, while avoiding major tax hikes.”

She added; “This raises concerns about UK debt sustainability and suggests a volatile period for Pound investors.”

Near-term GBP/USD direction is likely to remain closely linked to oil prices, global risk appetite and movements in UK gilt yields.

A sustained break below 1.3320 would reinforce the negative technical outlook and leave the 1.3200 area exposed.

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TAGS: Pound Dollar Forecasts