GBP/USD drops to near 1.3200 due to risk-off mood amid rising tensions in the Middle East

GBP/USD depreciates due to risk aversion amid rising geopolitical tensions in the Middle East.
The US Dollar receives support as Treasury yields continue to gain ground.
The BoE advocates a cautious approach to reducing rates, considering the persistently high inflation in the services sector.

Akhtar Faruqui FXStreet

GBP/USD extends its losing streak for the third consecutive day, trading around 1.3200 during the Asian session on Thursday. The risk-sensitive GBP/USD pair receives downward pressure due to the safe-haven flows amid escalating Middle-East tensions.

The Israeli Broadcasting Authority (IBA) reported that Israel's security cabinet has decided to issue a strong response to the recent Iranian attack. On Tuesday night, Iran launched over 200 ballistic missiles and drone strikes on Israel.

The improved US Treasury yields are supporting the US Dollar and undermining the GBP/USD pair. The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against its six major peers, continues to gain ground for the fourth successive session. The DXY trades around 101.80 with 2-year and 10-year yields on US bonds standing at 3.65% and 3.79%, respectively, at the time of writing.

On the data front, the ADP US Employment Change reported an increase of 143,000 jobs in September, exceeding the anticipated 120,000 jobs. Furthermore, annual pay increased by 4.7% year-over-year. The total number of jobs added in August was revised upward from 99,000 to 103,000.

The Bank of England (BoE) has been advocating a cautious approach to reducing interest rates, considering the still-high inflation in the services sector and relatively robust economic growth. In its quarterly statement released on Wednesday, the BoE's Financial Policy Committee (FPC) noted that “risks to UK financial stability are broadly unchanged since June.”

BoE policymaker Megan Greene warned that a consumption-driven recovery in the United Kingdom (UK) could trigger a new wave of inflation. However, Greene noted that further interest rate cuts are likely, as prices are "moving in the right direction."

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

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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