Bearish momentum is gaining traction in GBP/USD as the pound slid to a fresh two-week low at 1.3328, in early NorAm, down from early July highs of 1.3556. This decline is largely driven by the widening conflict in the Middle East and the subsequent surge in oil prices, with Brent crude testing $100/bbl today, a sharp increase from its early July, Memorandum of Understaning, lows of $70/bbl.

Traders appear to be concerned that this rise in oil prices could significantly impact both UK and global inflation expectations and thus further delay the Bank of England's efforts to reach its 2% inflation target.

This dynamic is also pushing UK 10-year gilt yields higher, exacerbating fiscal concerns, with sights set on pre-Memorandum of Understanding levels near 5.20%. These fiscal concerns are not helped by uncertainty over how new Prime Minister Andy Burnham will attempt to balance rising inflation, subdued growth, and high financing costs in managing the UK budget, even though he has committed to fiscal responsibility.

Currently, GBP/USD is finding some support at today's North American session low of 1.3328. However, the consistent pattern of lower highs and lower lows suggests a persistent bearish trend, which could bring the July 2 low of 1.3276 into focus. For a reversal of this bearish outlook, bulls would need to achieve a close above the daily cloud top, currently situated at 1.3425.
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(Paul Spirgel is a Reuters market analyst. The views expressed are his own)