Pound Sterling remains on the back foot against firmer USD amid Mideast crisis

GBP/USD attracts some sellers for the third straight day as renewed US-Iran tensions benefit the USD.
Rising Oil prices fuel inflationary concerns and temper Fed rate cut bets, further underpinning the buck.
The BoE’s more hawkish outlook could offer some support to the GBP and help limit losses for the pair.

Haresh Menghani FXStreet

The GBP/USD pair trades with a negative bias for the third straight day on Tuesday, though it lacks follow-through selling and holds above the 1.3500 psychological mark during the Asian session. Moreover, the mixed fundamental backdrop warrants some caution before positioning for an extension of the recent pullback from the 1.3655-1.3660 area, the highest level since February 16, touched last Friday.

The US Dollar (USD) attracts safe-haven flows amid the US-Iran standoff over the Strait of Hormuz and diminishing odds for a rate cut by the US Federal Reserve (Fed) in 2026. A firmer USD, in turn, is seen as a key factor exerting some pressure on the GBP/USD pair. However, the Bank of England's (BoE) relatively more hawkish stance acts as a tailwind for the British Pound (GBP) and helps limit the downside for spot prices.

In the latest developments, Reuters reported that there was a fire and an explosion on a South Korean-flagged vessel in the strait. US President Donald Trump warned that Iran would be blown off the face of the earth if it attacks American vessels. Meanwhile, Iran attacked the United Arab Emirates (UAE) with a barrage of missiles and drones after the US announced a program called Project Freedom to guide ships stranded in the Gulf.

This raises the risk of a further escalation of tensions in the Middle East and triggers a fresh leg up in Crude Oil prices, fueling inflationary concerns and bets for more hawkish central banks, including the US Federal Reserve (Fed). The outlook further underpins the USD and weighs on the GBP/USD pair. Meanwhile, the BoE signaled that rate hikes could be appropriate if inflation remains persistent, which should support spot prices.

Traders now look forward to Tuesday's US economic docket – featuring the release of US ISM Services PMI, JOLTS Job Openings, and New Home Sales data. This, along with speeches from influential FOMC members, might provide some impetus to the buck and the GBP/USD pair. The focus, however, remains glued to the US Nonfarm Payrolls (NFP) report on Friday and geopolitical headlines, which might continue to infuse volatility.

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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