GBP/USD extends downside to near 1.3400 as US enters Israel-Iran war

GBP/USD trades in negative territory for the second consecutive day near 1.3405 in Monday’s Asian session.
The US Dollar gains traction after the US attacked Iran over the weekend.
Retail Sales fell by 2.7% MoM in May, weighing on the Pound Sterling.

Lallalit Srijandorn FXStreet

The GBP/USD pair extends the decline to around 1.3405 during the Asian trading hours on Monday. The fears that Iran would retaliate against US attacks on its nuclear sites boost the safe-haven flows, supporting the US Dollar (USD). Investors await the preliminary reading of the Purchasing Managers Index (PMI) for June from the UK and the US, which are due later on Monday.

The United States carried out airstrikes on three nuclear sites in Iran early Sunday despite US President Donald Trump’s longtime promises to avoid new foreign conflicts, per Bloomberg. Trump said Iran’s key nuclear enrichment facilities had been “totally obliterated” and warned of “far greater” attacks unless Iran agreed to make peace. Iran has vowed to respond, saying it “reserves all options.” The escalating tension in the Middle East and fears of wider conflict boost the demand for safe-haven assets, which lift the Greenback against the Cable.

The downbeat UK Retail Sales data prompted traders to raise bets on further interest rate cuts from the Bank of England (BoE), weighing on the Pound Sterling (GBP). UK Retail Sales fell 2.7% MoM in May versus a rise of 1.3% prior (revised from 1.2%), the Office for National Statistics (ONS) reported on Friday. This figure came in below the market consensus of a decline of 0.5%.

The BoE decided to keep rates at 4.25% at its June policy meeting on Thursday, as widely expected. BoE Governor Andrew Bailey said that interest rates remain on a gradual downward path but warned, "The world is highly unpredictable.” Economists polled by Reuters expect BoE policymakers to cut rates by 25 basis points (bps) at the next meeting in August and to reduce another 25 bps in the fourth quarter.

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

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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