British Pound moves away from multi-week top as Hormuz risks support USD

GBP/USD kicks off the new week on a softer note as geopolitical uncertainties support the USD.
The disappointing US NFP further tempers Fed hike bets, which might cap the upside for the buck.
Market focus now shifts to this week’s release of US inflation figures and the prelim UK Q2 report.

Haresh Menghani FXStreet

The GBP/USD pair edges lower at the start of a new week and moves further away from an over three-week high, or levels just above the 1.3500 psychological mark touched on Friday.

The US Dollar (USD) is looking to build on its recovery from the post-NFP swing low amid persistent uncertainties surrounding the Middle East crisis and efforts to reopen the Strait of Hormuz. This, in turn, acts as a headwind for the GBP/USD pair, though the downside seems limited as receding US Federal Reserve (Fed) rate hike bets could limit any meaningful USD appreciation.

The closely-watched US monthly jobs data showed that the economy lost 23Kjobs in July, while the previous month's reading was revised lower to 20K from 57K, pointing to signs of a cooling labor market. Traders were quick to react and are now pricing in a less than 45% chance that the US central bank will raise borrowing costs in September, down from 67% a week ago.

However, investors are still assigning a greater probability of at least one 25-basis-point (bps) rate increase before the end of this year amid concerns that recovering oil prices will rekindle inflationary pressures. Hence, the focus shifts to the latest US inflation figures, due this week. Apart from this, the incoming geopolitical headlines will drive the USD and influence the GBP/USD pair.

Investors will further confront the release of the prelim UK Q2 GDP report on Thursday, which will play a key role in providing a fresh impetus to the British Pound (GBP). Nevertheless, the aforementioned fundamental backdrop warrants some caution before placing fresh bullish bets on the GBP/USD pair and positioning for an extension of a nearly two-week-old uptrend.

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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