GBP/USD gains ground as investor sentiment bets on Middle East cooldown

GBP/USD lurched back above 1.3500 on Monday as investors brace against weekend missile attacks.
A tentative ceasefire may prove market bets of a cooldown correct.
Double-header appearances from central bank heads is due on Tuesday.

Joshua Gibson FXStreet

GBP/USD gained ground on Monday, lurching higher after the US chose to get directly involved in the spiraling Israel-Iran conflict that started recently. The Trump administration, skirting around congressional authority, ordered a barrage of attacks on Iranian nuclear facilities over the weekend, sparking a surge in crude oil markets. Following Iran’s retaliatory attacks early Monday on US Air Force installations in Qatar, all parties have tentatively agreed to a ceasefire, and talks between Iran and Israel are expected to begin.

The tumultuous evolution of Middle East conflicts sparked a bearish pivot in Greenback markets as investors banked on a slowdown in tit-for-tat missile attacks. The global pivot out of the US Dollar sent Cable bids back above the 1.3500 handle.

Coming up on Tuesday, Bank of England (BoE) Governor Andrew Bailey will be testifying before the Economic Affairs Committee in the UK Parliament. The UK has been battling a meandering economy in recent months, and Governor Bailey is expected to hold steady to BoE messaging.

Federal Reserve (Fed) Chair Jerome Powell makes his own appearance in government testimony, kicking off two days of speeches before congressional and Senate economic committees. Market attention will be much more focused on Fed head Powell, as investors await to see how the Fed will react to ongoing derision from US President Donald Trump over the Fed’s reluctance to deliver rate cuts that could benefit Trump’s deficit-swelling budget bill.

GBP/USD price forecast

GBP/USD rallied back above the 1.3500 handle on Monday after a failed attempt to get back over the near-term technical barrier last week. An early-hours plunge saw Cable take a technical bounce from the 1.3400 key level, sparking an extended rise through the early week’s trading session.

GBP/USD daily chart

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

Joshua Gibson

FXStreet

Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.

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