British Pound weakens as US Dollar gains despite easing safe-haven demand

The British pound experienced a decline as the US dollar gained strength, despite easing demand for safe-haven assets. Throughout Wednesday, the GBP/USD pair traded around 1.3450, dropping during Asian trading hours. This shift was driven by the US Dollar's momentum, fueled by a rebound in US Treasury yields, which had fallen to 4.61% on Tuesday.

Falling energy prices alleviated inflation concerns and eased expectations of a hawkish response from the Federal Reserve. However, the greenback might face additional hurdles due to easing safe-haven demand as diplomatic progress was made toward reopening the Strait of Hormuz. The Qatari officials unveiled an interim proposal on Tuesday, with both the United States and Iran indicating substantial advancements in negotiations to restore access to the vital sea passage.

This development follows President Donald Trump's decision to suspend military strikes against Iran, opting to provide negotiations space while demanding the immediate reopening of the waterway. Forex analysts at Scotiabank noted that Sterling showed a "modest firmness" on Tuesday, though they emphasized that trading remained constrained without UK data reports to generate volatility.

They added that UK Gilts underperformed European bonds, while EURGBP remained largely stable, reflecting the generally subdued atmosphere in UK markets. The recent Bank of England meeting reinforced expectations that policymakers would not rush to tighten monetary policy, leading to a reduction in interest rate hike expectations for 2026.

This dovish shift might weaken investor appetite for the British Pound, resulting in a lower exchange rate against major currencies. Despite the Bank of England voting 6-3 to maintain the current rates, with a few members arguing for a hike, Governor Andrew Bailey indicated that disinflation continues to progress. Some policymakers even suggested that rate cuts could be reconsidered if Middle East tensions continue to subside.

Still, analysts at Scotiabank view the outlook for the Pound as "neutral/bullish," stating that Sterling continues to fluctuate around the 100- and 200-day moving averages, both close to 1.34, as the flat, broad range trade persists. Consequently, GBP/USD remains trapped within this well-established range.