Pound Sterling hangs near weekly low vs. USD amid rising Middle East tensions

GBP/USD drifts lower for the third straight day as escalating geopolitical tensions lift the USD.
Inflation concerns continue to push US bond yields higher and further benefit the Greenback.
The aggressive reprising of BoE rate expectations offers support to the GBP and spot prices.

Haresh Menghani FXStreet

The GBP/USD pair attracts sellers for the third straight day and touches a fresh weekly low, around the 1.3370 region, during the Asian session on Thursday. Spot prices, however, recover a few pips in the last hour and currently trade around the 1.3400 mark, down less than 0.15% for the day.

Given that there are no significant signs of an end to ongoing hostilities in the Middle East, the US Dollar (USD) benefits from the global flight to safety and continues to exert pressure on the GBP/USD pair. In fact, Iran’s Islamic Revolutionary Guard Corps (IRGC) said that it launched a joint operation with Lebanon's Hezbollah against targets in Israel, Jordan, and Saudi Arabia. This follows the most intense US-Israeli bombardments on Iran on Tuesday and marks a further escalation of the military conflict between Israel-US forces and Iran.

Meanwhile, reports that two tankers were attacked in the northern Persian Gulf near Iraq and Kuwait triggered a fresh leg up in Crude Oil prices. This, in turn, threatens the inflation outlook and remains supportive of a further rise in the US Treasury bond yields, providing an additional boost to the USD. However, the US Consumer Price Index (CPI) released on Wednesday pointed to signs of moderate price growth, keeping the door open for more rate cuts by the Federal Reserve (Fed). This caps the USD upside and offers support to the GBP/USD pair.

Furthermore, the repricing of the Bank of England (BoE) interest rate expectations holds back traders from placing aggressive bearish bets around the British Pound (GBP). In fact, bets for three interest rate cuts by the BoE have now been replaced with a greater probability of a rate hike by the end of this year. The hawkish outlook, in turn, contributes to limiting losses for the GBP/USD pair and warrants some caution before positioning for an extension of this week's modest retracement slide from the vicinity of the 1.3500 psychological mark.

Traders now look forward to BoE Governor Andrew Bailey's speech for some impetus later today, ahead of the monthly UK GDP print and the US Personal Consumption Expenditure (PCE) Price Index on Friday. The focus, however, will remain glued to geopolitical developments amid concerns about the war-driven surge in inflationary pressures, which would influence the central banks' policy outlook and infuse volatility in the financial markets.

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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