Pound Sterling edges lower as Iran war concerns revive USD demand; downside seems limited

GBP/USD attracts some sellers as geopolitical uncertainties underpin the safe-haven USD.
Inflation concerns dim prospects for more rate cuts by the Fed and also benefit the buck.
The aggressive reprising of BoE rate expectations lends support to the GBP and spot prices.

Haresh Menghani FXStreet

The GBP/USD pair struggles to capitalize on the previous day's move higher and edges lower during the Asian session on Tuesday. Spot prices, however, manage to hold above the 1.3400 mark as investors await further developments surrounding the US-Israel-Iran war before placing fresh directional bets.

The US Dollar (USD) attracts fresh buyers following the previous day's pullback from over a three-month high and turns out to be a key factor acting as a headwind for the GBP/USD pair. Iran’s Islamic Revolutionary Guard Corps (IRGC) dismissed US President Donald Trump’s remarks that the war is close to ending and said that Tehran, not Washington, will determine when the war ends. This keeps geopolitical risks in play and revives demand for traditional safe-haven assets, including the USD.

Meanwhile, concerns about supply disruptions remain due to the closure of the Strait of Hormuz. This assists Crude Oil prices to regain positive traction following Monday's dramatic turnaround from the highest level since June 2022. Investors seem worried that the continuous rise in energy prices would rekindle inflation and delay rate cuts by the US Federal Reserve (Fed). This remains supportive of elevated US Treasury bond yields, which further benefits the Greenback and caps the GBP/USD pair.

The British Pound (GBP), however, draws support from the aggressive repricing of interest rate expectations. In fact, bets for three rate cuts by the Bank of England (BoE) have been replaced with a roughly 70% probability of a rate hike by year-end. This, in turn, could act as a tailwind for the GBP/USD pair, suggesting that any meaningful intraday slide could be seen as a buying opportunity. Traders now look forward to BoE Governor Andrew Bailey's speech on Thursday for a fresh impetus.

Apart from this, the US inflation figures – the Consumer Price Index (CPI) and the Personal Consumption Expenditure (PCE) Price Index – and the monthly UK GDP print scheduled this week would influence the GBP/USD pair. The focus, however, will remain glued to geopolitical developments, which will continue infusing some volatility in the financial markets and play a key role in influencing the USD price dynamics.

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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