British Pound consolidates near three-week low as Fed bets and Iran tensions support USD

GBP/USD bulls seem hesitant as Fed rate bets help limit the weak US ADP-led USD decline.
Escalating US-Iran tensions further underpin the safe-haven USD and keep a lid on the pair.
Traders look to US ISM Services PMI for some impetus ahead of the NFP report on Friday.

Haresh Menghani FXStreet

The GBP/USD pair consolidates below the 1.3500 psychological mark during the Asian session on Thursday and remains close to a three-week low, touched the previous day.

The US Dollar (USD) stabilizes following the previous day's corrective fall amid Federal Reserve (Fed) rate hike expectations and geopolitical uncertainties. Traders ramped up their bets that the US central bank will raise borrowing costs this month following Fed Chair Kevin Warsh's hawkish remarks last Friday. Furthermore, inflation risks stemming from higher energy prices back the case for Fed policy tightening, which, in turn, offers some support to the USD and acts as a headwind for the GBP/USD pair.

Meanwhile, tensions between the US and Iran have flared up following fresh American strikes on Iranian targets and retaliatory drone and missile attacks by Tehran across the Gulf region. Adding to this, continued clashes over the Strait of Hormuz keep the geopolitical risk premium in play, which, in turn, is seen as another factor underpinning the safe-haven Greenback. However, sliding US bond yields hold back USD bulls from placing aggressive bets and help limit further losses for the GBP/USD pair.

Traders now look forward to the release of the US ISM Services PMI for some impetus, though the focus remains on the closely watched US monthly employment details – popularly known as the Nonfarm Payrolls (NFP) report on Friday. Apart from this, further developments surrounding the Middle East crisis might continue to infuse volatility in financial markets, which might continue to influence USD price dynamics and produce short-term trading opportunities around the GBP/USD pair.

GBP/USD 4-hour chart

Technical Analysis

The GBP/USD pair trades around the 200-period Simple Moving Average (SMA) on the 4-hour chart and above the 50.0% Fibonacci retracement of the July-August upside. A convincing break below should pave the way for deeper Fibonacci floors at 1.3425 and 1.3357, where buyers would be expected to defend the underlying bullish structure.

On the upside, initial resistance is located at the 38.2% Fibo. retracement at 1.3521, followed by the 23.6% retracement at 1.3580, with a more distant barrier at the cycle high anchor near 1.3676.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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