Sterling today: Pound caught in Iran crossfire as dollar finds fresh legs

The market is starting to price a regime where geopolitics and inflation reinforce each other rather than offset. That matters because it pushes the dollar from a pure risk-off hedge into a higher-for-longer carry asset, which is a more durable source of FX pressure on cyclical European currencies and funding-sensitive emerging markets. The second-order effect is that any oil-linked deterioration in global trade balances now transmits faster into FX than into rates, because central banks are boxed in by sticky inflation and limited policy credibility.

Sterling looks especially vulnerable because the domestic narrative has lost its premium cushion, leaving it exposed to imported energy inflation without an offsetting policy catalyst. In practice, that raises the odds of underperformance versus the euro on any renewed crude spike, since the euro still benefits from a larger current-account base and deeper hedging demand. If the conflict persists for weeks, not days, the more important trade is not just GBP/USD downside but a broader repricing of UK real yields and consumer cyclicals tied to discretionary spending.

The key catalyst is the next inflation print: a softer core number can briefly relieve dollar pressure, but it is unlikely to unwind the market’s new term premium unless energy retraces materially. That makes the asymmetry skewed toward fading any relief rallies in EUR/USD rather than chasing dollar strength after it has already extended. The market is also underestimating how quickly elevated crude feeds through to June and July inflation expectations, which can keep real rates supported even if nominal yields stall.

Contrarian risk: if there is any de-escalation, the unwind could be violent because positioning is likely to cluster around the same dollar-long, euro/sterling-short expression. But the bigger miss is that a ‘limited’ military exchange can still leave oil structurally bid through shipping insurance, precautionary inventory building, and wider risk premiums. That means the fastest money is in volatility, not direction — the market may overstate how quickly a headline ceasefire would normalize FX if physical crude remains tight.