British Pound flat lines around mid-1.3300s vs USD amid Iran tensions

GBP/USD opens the new week on a subdued note amid a mixed fundamental backdrop.
Hormuz risks offer support to the safe-haven USD, capping the upside for spot prices.
Traders look to the UK Construction PMI and the US ISM Services PMI for a fresh impetus.

Haresh Menghani FXStreet

The GBP/USD pair struggles to capitalize on last week's strong move higher and oscillates in a narrow band, around the 1.3350 area during the Asian session on Monday. Moreover, spot prices remain below a technically significant 200-day Simple Moving Average (SMA), warranting caution before positioning for an extension of the recent recovery from the 1.3140 zone, or the year-to-date low touched in June.

The US Dollar (USD) kicks off the new week on a positive note amid renewed tensions over the critical Strait of Hormuz and turns out to be a key factor acting as a headwind for the GBP/USD pair. In fact, Iran’s ambassador to China said on Saturday that Tehran plans to introduce new service fees for ships passing through the strategically important waterway. His remarks come despite the US rejecting the idea of Iran charging vessels for using the strait. This keeps the geopolitical risk premium in play and benefits the Greenback's safe-haven status.

Meanwhile, traders trimmed their bets for interest rate hikes by the US Federal Reserve (Fed) in the wake of unimpressive US monthly employment details, released last Thursday, which pointed to softening labor conditions. Furthermore, easing inflation fears in the face of the recent slump in Crude Oil prices temper market expectations of higher-for-longer interest rates. The resultant shift in bets for zero and one Fed rate hike in 2026, from one to two rate increases, holds back USD bulls from placing aggressive bets and lends support to the GBP/USD pair.

The British Pound (GBP), on the other hand, benefits from commitment from Andy Burnham – the frontrunner to succeed Keir Starmer as UK Prime Minister – to adhere to strict borrowing rules. The GBP bulls, however, seem hesitant as mixed UK PMIs last week pointed to a significant economic slowdown, led by the dominant services sector. This could cap the GBP/USD pair as traders now look to the UK Construction PMI. Meanwhile, the US economic docket highlights the ISM Services PMI, which could provide some impetus later during the North American session.

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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