The pound fell to 1.3482 against the dollar on Monday, dropping 0.33% on the session and breaking below the $1.35 level. The currency had declined 0.27% over the previous day and 0.38% over the past week.
The weakening of sterling was not driven by UK-specific factors — no domestic data or Bank of England commentary was cited — but rather by a broader dollar rally underpinned by surging oil prices and expectations of a more hawkish Federal Reserve.
Brent crude rose more than 3% during the session after Saudi Arabia shut its East-West pipeline following drone attacks traced to Iraq. The disruption added to Gulf supply concerns that have been supporting energy markets throughout the week.
Expectations for a Federal Reserve policy shift were already firmly anchored after a hotter-than-expected U.S. Consumer Price Index report late last week appeared to all but guarantee a rate decision favoring further tightening when policymakers meet on Wednesday.
Markets were pricing in a near-unanimous 22 basis point move in the direction of tighter monetary policy.
Francesco Pesole, FX strategist at ING, said the institution continued to favor a moderately stronger dollar from current levels. He noted that a clearly hawkish message from the Fed on Wednesday could help rebuild the positive correlation between the dollar and Treasury yields, restoring the greenback's role as a safe-haven currency more effectively.
A return of the DXY dollar index to the 99.50–100 range remained a tangible possibility, Pesole said, citing ongoing Gulf supply risks alongside fresh pressure on equities from AI-related volatility. The Fed may retain a hawkish tone given bond-market demands for policy credibility and the recent rise in energy prices, he added.
The euro also came under pressure, falling 0.55% to 1.1535 and breaking below the 1.1600 level that had held through last week. Attention for the single currency turned to Germany's ZEW survey and comments from European Central Bank President Christine Lagarde in Vienna, following earlier remarks by Isabel Schnabel and Piero Cipollone.
ING noted that last week's hawkish ECB messaging may slow the pace of the euro's decline, though the bank's macro team remained skeptical about further ECB rate hikes outside of risk factors tied to Gulf supply disruptions. ING's near-term target for the euro sits at 1.1500.
