Pound Sterling declines below 1.3450 on Middle East tensions, UK political uncertainty

GBP/USD drifts lower to near 1.3420 in Monday’s early Asian session.
The US and Israel are engaged in major combat operations against Iran, following a massive joint military strike launched on Saturday.
The UK political risks and BoE easing expectations weigh on the Pound Sterling.

Lallalit Srijandorn FXStreet

The GBP/USD pair attracts some sellers to around 1.3420 during the early Asian session on Monday. The US Dollar (USD) edges higher against the Cable amid escalating tensions in the Middle East after recent US-Israeli strikes on Iran over the weekend.

The United States (US) and Israel have conducted military strikes across Iran. The action comes after weeks of warning from Washington about Iran's nuclear weapons program and clashes between protesters and the country’s government. US strikes on Iran over the weekend reignited fears that tensions could escalate to wider war in the region. This, in turn, provides some support to safe-haven currencies like the US Dollar (USD) and acts as a headwind for the major pair.

A landmark by-election loss for the Labour Party in Gorton and Denton raises questions about Prime Minister Keir Starmer's leadership. This, along with the Bank of England (BoE) easing expectations, might contribute to the Pound Sterling’s (GBP) downside in the near term.

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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