British Pound edges higher vs softer USD; lacks bullish conviction as Iran risks persist

GBP/USD reverses a part of the overnight losses as an Israel-Lebanon truce undermines the USD.
Stalled US-Iran peace talks and hawkish Fed expectations should limit deeper losses for the buck.
Traders also seem hesitant and opt to wait for the release of the crucial US NFP report on Friday.

Haresh Menghani FXStreet

The GBP/USD pair attracts some dip-buyers following the previous day's slide back closer to the weekly low and trades above the 1.3400 mark during the Asian session on Thursday. The uptick is sponsored by a softer US Dollar (USD), though the upside potential seems limited amid persistent geopolitical uncertainties.

In a joint statement with the US on Wednesday, Israel and Lebanon announced they agreed to the implementation of a ceasefire after peace talks in Washington. The latest development eases concerns about a broader regional conflict and keeps a lid on the safe-haven USD's move higher witnessed since the beginning of this week. This, in turn, is seen as a key factor offering some support to the GBP/USD pair. However, renewed hostilities in the Gulf keep geopolitical risks in play and should limit deeper USD losses, warranting caution before placing aggressive bullish bets on the currency pair.

The US military said on Tuesday that it had successfully repelled multiple Iranian missiles and drones launched at Kuwait and Bahrain, and had conducted self-defense strikes on Qeshm Island in response to the attacks. Meanwhile, Iranian armed forces targeted the US military bases in Bahrain in retaliation for the strike on Qeshm. This comes on the back of the lack of a progress in US-Iran diplomatic negotiations, amid a standoff over Tehran's nuclear program and the Strait of Hormuz. Furthermore, bets that the US Federal Reserve (Fed) will hike rates in 2026 should support the buck and cap the GBP/USD pair.

Traders might also opt to move to the sidelines ahead of the release of the closely watched US monthly employment details, popularly known as the Nonfarm Payrolls (NFP) report, on Friday. The crucial jobs data will be looked for more cues about the Fed's future policy path. This, along with further developments surrounding the Middle East crisis, should infuse volatility across global financial markets and influence USD price dynamics. Nevertheless, the fundamental backdrop seems tilted in favor of USD bulls, suggesting that the GBP/USD pair is likely to attract fresh sellers at higher levels.

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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