Pound Sterling edges higher despite Middle East uncertainty

GBP/USD edges higher to around 1.3580 in Monday’s early Asian session.
Traders will closely monitor the developments surrounding the Middle East.
The BoE and the Fed left the interest rates unchanged at the April policy meeting last week.

Lallalit Srijandorn FXStreet

The GBP/USD pair posts modest gains near 1.3580 during the Asian trading hours on Monday. Nonetheless, the potential upside for the major pair might be limited amid Middle East uncertainty. The US employment report for April will take center stage later on Friday.

Markets could turn cautious after US President Donald Trump said the US would start an effort on Monday morning to free ships stranded in the Strait of Hormuz as a "humanitarian ‌gesture" to aid neutral countries in the US-Israeli war with Iran. An Iranian official warned that US interference in Hormuz will be considered a violation of the ceasefire, adding that the Strait of Hormuz and the Persian Gulf are not a place for rhetoric.

Iran earlier claimed that the US had reacted to its 14-point plan through Pakistan, and it was reviewing the response, though Trump said it was unlikely to be acceptable. Signs of rising tensions in the Middle East could boost a safe-haven currency such as the US Dollar (USD) and create a headwind for the major pair.

Last week, both the Bank of England (BoE) and the US Federal Reserve maintained current interest rates. BoE Governor Andrew Bailey said if price pressures triggered by the conflict proved to be severe, a “forceful tightening” would be required. Bailey played down fears of near-term rate hikes but added that "we'll continue to monitor the situation and its impact on the UK economy very closely.”

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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