Sterling extended its decline against the US dollar during Thursday's Asian session, hovering near 1.3200 and pressured for a second consecutive trading day.

The greenback remained relatively firm, with US Treasury yields holding near their highest levels since 2002, providing significant support to the dollar.

At the same time, international oil prices have climbed again recently, reviving market concerns that energy costs could delay the decline in inflation and reinforce expectations that major central banks will keep interest rates elevated for longer.

With the dollar's rate advantage yet to diminish noticeably, any near-term rebound in sterling faces headwinds.

Fed policy remains the core driver

Federal Reserve monetary policy continues to be the central factor influencing the currency pair.

The latest meeting minutes showed that Fed officials unanimously supported a September rate hike, with most policymakers believing that further tightening before year-end could be appropriate if inflationary pressures persist.

According to the CME FedWatch tool, the market currently expects the Fed to hold rates steady in October, but the probability of a December hike still stands at 78.3%.

This means investors have not ruled out the possibility of further US monetary tightening, giving the dollar support from rate expectations.

Elevated US Treasury yields have also enhanced the appeal of dollar-denominated assets to international capital.

If the market continues to raise future policy rate expectations, or judges that inflation is falling more slowly than anticipated, Treasury yields could remain strong and limit the upside room for sterling against the dollar.

However, if upcoming US employment and economic data cool noticeably and the market begins to lower rate hike expectations, the dollar's yield advantage could weaken, offering the currency pair some intermittent support.

Recent remarks from Fed officials Christopher Waller and Alberto Musalem will serve as important references for the market in gauging policy direction.

UK faces its own energy price challenges

The UK is likewise confronting challenges from rising energy prices.

Higher oil prices could increase transportation, production and living costs, bringing UK inflation pressures back into focus and reinforcing expectations that interest rates will stay elevated for an extended period.

UK government bond yields have risen to multi-year highs, but higher yields do not necessarily benefit sterling.

If the rise in bond yields stems mainly from inflation risks, fiscal pressures or concerns about the economic outlook, rather than from improved growth and real returns, it could instead raise corporate financing costs, weigh on consumption and investment, and undermine market confidence in the UK economy.

Therefore, the pressure on sterling currently comes not only from a stronger dollar but also from the UK's own economic prospects.

If energy costs remain persistently high, the Bank of England may need to balance curbing inflation against avoiding further economic slowdown.

Maintaining higher rates helps control price pressures but could add to the financing burden on households and businesses.

If economic growth takes a more pronounced hit, sterling may not be able to secure sustained support simply from rising UK government bond yields.

Geopolitical risks feed through energy supply channels

Geopolitical risks are affecting foreign exchange markets through energy supply channels.

Market strategy firm DBS noted that security risks around the Strait of Hormuz are escalating.

According to the UK Maritime Trade Operations office, related attack incidents this month have reached nine, roughly half the September total.

These events have heightened market concerns about tanker shipping safety and energy supply disruptions.

Even if the Group of Seven coordinates a release of strategic reserves, Brent crude prices could still be supported by a supply risk premium.

If transportation through the Strait of Hormuz is further disrupted, oil prices could continue to rise and push up global inflation expectations.

For the UK, higher energy import costs could further intensify the policy dilemma between inflation and growth; for the US, rising oil prices could similarly increase inflation stickiness, thereby prolonging the high-rate environment.

The interplay of these two effects makes the near-term trajectory of sterling against the dollar more susceptible to combined drivers from US-UK rate expectation shifts and geopolitical headlines.

What to watch ahead

Looking ahead, the market will focus on Fed officials' speeches, US economic data, UK inflation and growth prospects, and Middle East energy transportation risks.

If the Fed continues to signal a hawkish stance while UK economic prospects come under further pressure, sterling against the dollar may extend its weakness.

Conversely, if US yields retreat, rate hike expectations cool, or UK economic data outperform expectations, the currency pair could see a technical rebound.

But with the dollar still enjoying fundamental support, whether any rebound can evolve into a trend reversal still requires more evidence.

Daily chart structure

On the daily chart, sterling against the dollar is trading near 1.3200, with a bearish near-term bias.

The pair is currently below the 9-period exponential moving average (EMA) at 1.3243 and also below the 50-period EMA at 1.3379.

Both moving averages sit above the current price, indicating dynamic resistance overhead, and the short-term trend has yet to show clear improvement.

The relative strength index (RSI) is around 36.16, approaching oversold territory but not yet at extreme levels, suggesting sellers still hold some advantage while also leaving room for a brief correction after sustained declines.

On the upside, the first focus is the 9-period EMA near 1.3243.

If the pair can effectively break above and hold that level, near-term downside pressure may ease somewhat.

If it rebounds further, the next test would be whether the 50-period EMA near 1.3379 can be breached.

If the pair remains capped by the moving averages, the overall bearish structure will persist.

4-hour chart structure

On the 4-hour chart, the pair remains weak near 1.3210, with the short-term trading direction still tilted downward.

However, existing data is insufficient to confirm a clear medium-to-short-term support level, so unverified target prices should not be arbitrarily set.

If the pair continues to decline with limited rebound strength, watch for further release of selling pressure.

If prices stabilize at lows and reclaim the area around 1.3243, a temporary rebound signal could form.

Going forward, the 4-hour candlestick structure, short-term high and low changes, and whether the RSI recovers should be combined to judge whether seller momentum is fading.

Summary

Sterling against the dollar is currently weighed down by multiple factors including dollar strength, US rate hike expectations and pressure on UK economic prospects, and the near-term bearish setup has not yet reversed.

US Treasury yields remain elevated, and the market still holds relatively high expectations for a December Fed hike, providing support to the dollar.

Meanwhile, rising oil prices are intensifying UK inflation pressures and could further drag on growth expectations.