GBP/USD drops towards 1.3500 as US weighs joining Israel in Iran conflict

• Cable drops to 1.3498 as Trump considers military support for Israel against Iran.
• Safe-haven flows lift US Dollar; DXY climbs to 98.43 despite soft US data.
• Fed and BoE policy decisions eyed; interest rate spread still favors the Greenback.

The GBP/USD tumbled below the 1.3500 figure for the first time in the week, down over 0.39%, as tensions in the Middle East remained high, with news sources revealing that the United States (US) is weighing whether to join Israel in its confrontation with Iran. At the time of writing, the pair traded at 1.3515, having previously reached daily highs of 1.3579.

Sterling slumps over 0.5% amid surging US Dollar demand and growing Middle East tensions

Geopolitical risks are boosting the US dollar, which, according to the US Dollar Index (DXY), which tracks the performance of the Dollar against six currencies, is up 0.31% at 98.43. On Monday, US President Donald Trump recommended Iranians in Tehran to evacuate as he exited abruptly from the G7 meeting in Canada.

According to Politico, US President Donald Trump is evaluating "whether to join Israel's bombardment of Iran." The source revealed that "Trump has been consistent that Iran can't have a nuclear bomb. Given the state of Iran's air defences there are a lot of options..."

In the meantime, GBP/USD traders are awaiting the monetary policy decisions of the Federal Reserve (Fed) and the Bank of England (BoE). Both are expected to keep rates unchanged, though the interest rate differential favors the US Dollar.

Data-wise, the US docket indicated that Retail Sales contracted in May due to a decline in major vehicle purchases. Sales dropped 0.9% month-over-month, which was below the forecast of 0.7%. In the twelve months leading up to May, sales rose sharply by 3.3%, down from a 5% jump in April.

Industrial Production in the US dived for the second time in three months, missing forecasts of 0.1% expansion, and fell -0.2% MoM.

Across the pond, the docket was empty, though there was progress in the US-UK talks in the G7. US President Donald Trump signed an agreement that lowered some tariffs on imports from Britain as both parties continued to engage toward a formal trade deal.

GBP/USD Price Forecast: Technical outlook

With the pair clearing 1.3500, the GBP/USD could be headed for a pullback, opening the door to challenge the May 29 swing low of 1.3414. Once decisively cleared, the next support would be the 50-day Simple Moving Average (SMA) at 1.3365.

Conversely, if GBP/USD reclaims the 20-day SMA at 1.3544, expect a test of 1.3600. A breach of the latter will expose the YTD high at 1.3631.