British Pound remains depressed below 1.3400 as escalating US-Iran tensions underpin USD

GBP/USD kicks off the new week on a weaker note, though the downside remains cushioned.
Easing UK political uncertainty and BoE rate hike bets lend support to the GBP and spot prices.
Escalating US-Iran tensions and hawkish Fed expectations underpin the USD, capping the pair.

Haresh Menghani FXStreet

The GBP/USD pair finds some support near 1.3370 after a modest gap-down opening on Monday, though it lacks bullish conviction and remains below 1.3400. Nevertheless, spot prices, for now, seem to have stalled the pullback from a nearly four-week high, around the 1.3450 area, touched on Friday amid mixed fundamental cues.

Former Greater Manchester mayor Andy Burnham secured the support of the vast majority of Labour MPs to replace Keir Starmer and become Britain's next prime minister, calming concerns about political instability. This, along with bets for at least one 25-basis-point (bps) interest rate hike from the Bank of England by the end of 2026, lends some support to the British Pound (GBP). However, escalating US-Iran tensions benefit the safe-haven US Dollar (USD) and might keep a lid on any further upside for the GBP/USD pair.

The US military launched another round of strikes at Iran after Iran’s Islamic Revolutionary Guard Corps (IRGC) announced the closure of the Strait of Hormuz and fired at another commercial vessel in the waterway. In response, Tehran fired a wave of attacks targeting US military bases in the region over the weekend, underpinning the safe-haven buck. Furthermore, rising Oil prices revive inflationary concerns and bolster US Federal Reserve (Fed) rate-hike expectations, further benefiting the USD and capping the upside for the GBP/USD pair.

Moving ahead, there isn't any relevant market-moving economic data due for release on Monday, either from the UK or the US, leaving spot prices at the mercy of the USD price dynamics. Later during the North American session, traders will take cues from speeches by influential FOMC members. The market focus, however, remains clued to the latest US inflation figures, which will drive expectations about the Fed's policy path. This, in turn, will provide some meaningful impetus to the Greenback and the GBP/USD pair during the latter half of the week.

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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