British Pound edges higher vs softer USD; lacks follow-through as geopolitics cap gains

GBP/USD gains some positive traction on Friday as receding Fed hike bets undermine the USD.
Geopolitical risks limit deeper losses for the safe-haven buck and cap the upside for spot prices.
Thursday’s mixed UK macro data further warrant caution before positioning for further gains.

Haresh Menghani FXStreet

The GBP/USD pair attracts some dip-buyers during the Asian session on Friday and, for now, seems to have snapped a two-day losing streak to the weekly low, which it touched the previous day. Spot prices, however, struggle to capitalize on the uptick beyond the 1.3500 psychological mark, warranting some caution for bullish traders.

Traders further scale back their expectations for Federal Reserve (Fed) rate hikes following the release of a soft US Producer Price Index (PPI) report on Thursday. Moreover, the lack of surprise from the US Consumer Price Index (CPI) on Wednesday pointed to signs of cooling inflation and gives the US central bank more room to hold interest rates steady. This is seen as undermining the US Dollar (USD) and offering some support to the GBP/USD pair.

However, uncertainties surrounding the Middle East crisis help limit the downside for the safe-haven Greenback. US Treasury Secretary Scott Bessent said on Thursday that Washington is going to apply measures that have never been seen on Iran. On the other hand, a senior IRGC adviser Mohammad Reza Naqdi said that Tehran's strategy is to make any conflict so costly that future US administrations think twice before taking military action against Iran.

Furthermore, the US-Iran standoff over the Strait of Hormuz keeps the geopolitical risk premium in play, warranting caution for USD bears. In fact, President Donald Trump again claimed that the US has total control over the strategic waterway, while Iran has pledged to keep the strait closed until all its demands are met. Adding to this, Thursday's mixed UK macro data contributes to keeping a lid on further gains for the British Pound (GBP) and the GBP/USD pair.

Moving ahead, there aren't any relevant market-moving economic releases due from the UK on Friday, while the US docket features monthly Retail Sales and the Preliminary University of Michigan Consumer Sentiment Index. This, along with Fed speak and the incoming geopolitical headlines, might influence the USD price dynamics and provide some impetus to the GBP/USD pair. Nevertheless, spot prices seem poised to end the week on a flattish note.

GBP/USD 4-hour chart

Technical Analysis

The GBP/USD pair holds above the 100-period Simple Moving Average (SMA) on the 4-hour chart, keeping the near-term bias constructive. The said SMA near 1.3422 could offer initial support , where a break lower would hint at a deeper corrective phase. Nevertheless, the broader structure continues to favour dips being bought above the 100-SMA pivotal support.

(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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