British Pound holds steady above 1.3450 as Iran hopes and Fed repricing weigh on USD

GBP/USD oscillates in a range as traders await further developments around the Mideast crisis.
US-Iran peace deal hopes and receding Fed hike bets undermine the USD, supporting the major.
Traders now look to second-tier UK/US data, though the focus remains on the US NFP on Friday.

Haresh Menghani FXStreet

The GBP/USD pair is seen consolidating its gains recorded over the past two days and trading around the 1.3470 region during the Asian session on Thursday. Nevertheless, spot prices remain confined within Monday's broader range as traders opt to wait for further developments surrounding the Middle East crisis before placing fresh directional bets.

Iran’s Foreign Ministry spokesperson, Esmaeil Baghaei, said that Iran and Oman are close to finalizing a proposed framework for commercial shipping through the Strait of Hormuz. Adding to this, hopes for progress towards a peace deal between the US and Iran keep the safe-haven US Dollar (USD) depressed near a seven-week trough, touched on Monday, which, in turn, is seen acting as a tailwind for the GBP/USD pair.

Meanwhile, crude oil prices languish near a three-week low amid optimism over a diplomatic resolution to end a five-month-old US-Iran war and the potential reopening of the Strait of Hormuz. This helps ease inflation fears and temper expectations for a rate hike by the US Federal Reserve (Fed), which turns out to be another factor weighing on the buck and backs the case for a further appreciating move for the GBP/USD pair.

Strategists at Scotiabank’s Global FX Strategy team observe that the Pound remains underpinned, noting that “a solid rise in Cable last week and bullish leaning (but still weak) trend oscillators suggest some upside potential for the pound, however.” This assessment aligns with their view that short-term technicals are neutral to mildly positive, with recent price action and momentum indicators continuing to hint at scope for further gains while nearby support levels help anchor sentiment.

However, Yemen’s Iran-backed Houthis said ‌that they had launched a missile attack on a Saudi oil tanker off the coast of the kingdom's Red Sea port city of Yanbu and another in the Gulf of Aden. This keeps geopolitical risk premium in play, which helps limit deeper USD losses and caps the upside for the GBP/USD pair. Traders also seem hesitant ahead of the release of the crucial US Nonfarm Payrolls (NFP) report on Friday.

In the meantime, Thursday's economic docket, featuring the UK Construction PMI and the usual Weekly Initial Jobless Claims data from the US, could provide some impetus. Furthermore, the incoming geopolitical headlines might continue to infuse some volatility across global financial markets and produce some trading opportunities around the GBP/USD pair. The fundamental backdrop, however, seems tilted in favor of bulls.

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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