British Pound recovers slightly from three-week low as USD bulls pause for a breather

GBP/USD bounces off the three-week low touched during the Asian session on Monday.
The USD bulls pause for a breather following Friday’s upbeat NFP-inspired blowout rally.
The fundamental backdrop favors the USD bulls and should cap the upside for spot prices.

Haresh Menghani FXStreet

The GBP/USD pair recovers slightly from a three-week low, touched during the Asian session on Monday, and climbs closer to mid-1.3300s in the last hour. However, the underlying strong bullish sentiment surrounding the US Dollar (USD) warrants some caution before positioning for any further appreciating move.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, shot to a two-week high on Friday in reaction to the upbeat US Nonfarm Payrolls (NFP) report, which reaffirmed hawkish US Federal Reserve (Fed) expectations. The closely-watched employment details showed that the economy added 172K jobs in May, compared to 85K expected and the previous month's upwardly revised reading of 179K. Additional details revealed that the Unemployment Rate held steady at 4.3%, as anticipated, offsetting the widely expected slowdown in Average Hourly Earnings growth to the 3.4% YoY rate from 3.6% in April.

This comes on top of concerns that the war-driven rise in energy prices would fuel inflation and lift bets for an eventual rate hike by the Fed. According to the CME Group's FedWatch Tool, traders are currently pricing in over a 70% chance that the US central bank will raise borrowing costs by at least 25 basis points (bps) in 2026. This, along with geopolitical uncertainties, should continue to act as a tailwind for the safe-haven Greenback. Furthermore, the UK political turmoil, amid a challenge to Prime Minister Keir Starmer's leadership, could undermine the British Pound (GBP) and contribute to keeping a lid on the GBP/USD pair.

Traders might also opt to wait for further development surrounding the Middle East crisis. US President Trump called Israeli Prime Minister Benjamin Netanyahu to tell him not to attack Iran in response to three waves of ballistic missiles at Israel’s Ramat David air base on Sunday night. Trump further told Axios that they are very close to a final deal with Iran and that he does not want it to blow up because of what’s happening now. However, the US and Iran remain at odds over several key issues, including Tehran's nuclear program and the critical Strait of Hormuz. This keeps geopolitical risks in play and favors the USD 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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