British Pound recovers from two-month low ahead of BoE as Iran peace deal weigh on USD

GBP/USD moves away from a two-month low as the US-Iran peace deal prompts USD profit-taking.
The Fed’s projection of a rate increase this year could help limit USD losses and cap spot prices.
Reduced BoE rate hike bets further warrant caution before positioning for any meaningful gains.

Haresh Menghani FXStreet

The GBP/USD pair gains some positive traction during the Asian session on Thursday and moves away from its lowest level since April 7, around the 1.3260 region set the previous day. Spot prices retake the 1.3300 mark amid a modest US Dollar (USD) downtick, though the upside potential seems limited amid a bearish fundamental backdrop.

US President Donald Trump and Iranian President Masoud Pezeshkian electronically signed a Memorandum of Understanding (MoU) aimed at ending hostilities between the two countries and reopening the Strait of Hormuz. Furthermore, Trump said that the 60-day negotiation period to reach a final agreement on Iran's nuclear program is not a hard deadline, boosting investors' confidence. This, in turn, prompts some USD profit-taking, following the overnight hawkish Federal Reserve (Fed)-inspired rally to the highest level since late March, and lends support to the GBP/USD pair.

As was widely expected, the US central bank kept its benchmark overnight borrowing rate anchored in a range of 3.5%-3.75% and dramatically altered the policy statement, removing the key language indicating a bias toward future cuts. Adding to this, the median estimate for the fed funds rate at the end of 2026 is now at 3.8%, up from 3.4% in the prior projections from March, signaling that the committee sees at least one rate hike this year. This could help limit the USD corrective decline and cap the GBP/USD pair amid receding bets for more aggressive tightening by the Bank of England (BoE).

In fact, BoE rate hike bets cooled after the UK Office for National Statistics (ONS) reported on Wednesday that the headline Consumer Price Index (CPI) held steady at 2.8% YoY in May. Adding to this, the core gauge, excluding volatile food and energy items, fell short of consensus estimates and rose 2.6% YoY during the reported month, compared to 2.5% in April. The data endorsed the view that the BoE will hold interest rates steady. This might hold back traders from placing bullish bets around the British Pound (GBP) and the GBP/USD pair as the focus remains on the BoE meeting later today.

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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