GBP/USD tumbles below 1.3550 amid risk-off sentiment

GBP/USD softens to around 1.3530 in Friday’s early European session.
Risk-off sentiment amid escalating Israel-Iran tensions drags the Pound Sterling lower.
Bets of Fed interest rate cuts could weigh on the US dollar and help limit the pair’s losses.

Lallalit Srijandorn FXStreet

The GBP/USD pair loses ground to near 1.3530 during the early European session on Friday. The Pound Sterling (GBP) weakens against US Dollar (USD) due to heightened geopolitical tensions in the Middle East. Investors brace for the preliminary reading of the US Michigan Consumer Sentiment report, which is due later on Friday.

Israeli Defense Minister Israel Katz said late Thursday that there had been a “preemptive strike against Iran” and declared a state of emergency as the country prepared for retaliation. Meanwhile, Israel's Prime Minister Benjamin Netanyahu noted that the operation will continue for as many days as it takes.

Iranian state media conveyed a statement from Iran's Armed Forces General Staff that the US and Israel will receive a "harsh blow" in response. Fresh confrontations in the Middle East raise the fears of geopolitical risks and exert some selling pressure on the riskier currencies like the Cable.

On the other hand, cooler-than-expected US Producer Price Index (PPI) inflation data released on Thursday have lifted the prospect for a rate cut from the US Federal Reserve (Fed). This, in turn, could undermine the US Dollar and act as a tailwind for the major pair.

The US Producer Price Index (PPI) rose 0.1% MoM in May, compared to a decline of 0.2% (revised from -0.5%), the Bureau of Labor Statistics reported on Thursday. This reading came in softer than the estimations of a 0.2% rise. Meanwhile, the core PPI, excluding food and energy, increased 0.1% MoM in May versus -0.2% prior (revised from -0.4%), below the market consensus of 0.3%.

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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