Sterling Slips Below $1.35 on Oil Rally and Fed Expectations

Sterling dipped below the $1.35 threshold on Monday, falling 0.33% to trade at 1.3482 against the greenback as a broad dollar rally gathered momentum. According to an Investing.com report, the downward pressure on major European currencies stemmed entirely from external macroeconomic catalysts rather than domestic UK economic fundamentals.

"We continue to favour a moderately stronger dollar from here," said Francesco Pesole, FX Strategist at ING, in a statement cited by Investing.com.

Crude Supply Disruptions Fuel Greenback

The surging U.S. dollar found primary support in energy markets, where Brent crude climbed over 3% during the session. The commodity price jump followed supply disruptions in Saudi Arabia, which shut down its critical East-West pipeline after drone attacks originated from Iraq.

Simultaneously, the euro experienced steeper losses than sterling, with EUR/USD dropping 0.55% to 1.1535 and breaking decisively below the 1.1600 level maintained through the previous week. Foreign exchange strategists noted that energy-importing economies in Europe remain acutely vulnerable to sudden crude price escalations, which amplify trade deficit concerns and bolster safe-haven demand for U.S. currency.

Federal Reserve Rate Hike Pricing

Beyond energy shocks, foreign exchange markets are bracing for monetary policy tightening from Washington. Traders are pricing in a near-unanimous 22-basis-point interest rate hike by the Federal Reserve on Wednesday, a move deemed all but certain following hotter-than-expected U.S. Consumer Price Index data released last week.

"A message of monetary policy rigour by the Fed on Wednesday can help slowly rebuild the positive USD-Treasury yield correlation, allowing the greenback to function more efficiently as a safe haven," Pesole said.

What Drives Foreign Exchange Volatility Now?

The convergence of geopolitical supply shocks in the Middle East and aggressive U.S. monetary policy expectations highlights how macro correlations currently dominate currency valuations. By driving up global energy costs and cementing higher U.S. yields, these dual forces have crowded out domestic UK economic indicators, leaving sterling at the mercy of broader dollar liquidity flows ahead of the central bank announcement.