British Pound faces second straight weekly loss as tensions in the Middle East weigh ahead of US NFP

GBP/USD gains ground to near 1.3430 in Friday’s early European session.
Gulf hostilities weigh on the British Pound as a riskier asset.
The US May employment report will take center stage later on Friday.

Lallalit Srijandorn FXStreet

The GBP/USD pair holds modest gains near 1.3420 during the European trading hours on Friday. Despite the intraday rebound, the pair is set to register its second straight weekly loss as tensions in the Middle East weigh. Markets might turn cautious later in the day ahead of the key US employment report for May. The developments surrounding the US-Iran peace deal will also be closely watched.

US President Donald Trump's efforts to halt conflict in the Middle East and forge peace with Iran are facing fresh obstacles, after the Iran-backed Hezbollah militia rejected a new ceasefire in Lebanon on Thursday, while Israel said it would not withdraw troops from the country.

Iran’s Foreign Minister Abbas Araghchi said that lines of communication with Washington were still open but warned that any attack by Israel on the Lebanese capital, Beirut, as part of its campaign against Hezbollah would trigger a "full-scale resumption" of the US-Iran conflict. Ongoing tensions in the Middle East and lack of progress in the US-Iran peace talks could weigh on the riskier assets, such as the British Pound, as fuel safe-haven flows.

Bank of England (BoE) policymaker Megan Greene said on Tuesday that she saw a growing case for hiking interest rates as the Iran war drags on and boosts the chance of wide-ranging rises in prices across ‌the economy.

However, BoE governor Andrew Bailey delivered dovish remarks, saying that the UK central bank is in no rush to raise interest rates while the outcome of the Iran war remains uncertain and the UK’s growth rate stays weak. This, in turn, could drag the British Pound lower against the Greenback.

Traders will take more cues from the US employment report for fresh impetus. Analysts expected the US economy to show 85,000 jobs added in May, while the Unemployment Rate is projected to remain steady at 4.3%. In case of a surprise weaker-than-expected outcome, this could undermine the US Dollar (USD) and act as a tailwind for the major pair.

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

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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