Pound Sterling remains on the back foot as US-Iran tensions lift USD; bears seem hesitant

GBP/USD kicks off the new week on a weaker note as renewed US-Iran tensions boost the USD.
Rallying Oil prices revive inflation fears and lift US bond yield, further benefiting the Greenback.
The divergent Fed-BoE policy expectations support the GBP and help limit losses for spot prices.

Haresh Menghani FXStreet

The GBP/USD pair opens with a bearish gap at the start of a new week and moves further away from a two-month high, around the 1.3600 mark, touched on Friday. Spot prices, however, recover a few pips from a one-week low set during the early Asian session and currently trade just below the 1.3500 psychological mark, still down over 0.15% for the day.

The global risk sentiment takes a turn for the worse amid renewed US-Iran tensions over the Straight of Hormuz, which, in turn, provides a goodish lift to the safe-haven US Dollar (USD) and exerts pressure on the GBP/USD pair. Iran closed the strategic waterway after briefly opening it over the weekend. This comes on top of the US naval blockade of Iranian ports, and tempers hopes for more peace talks before the end of the current ceasefire on April 22.

In fact, Iran’s official IRNA news agency reported on Sunday that Iran would not participate in the second round of talks with the US. Adding to this, US President Donald Trump warned that he would knock out every single power plant and every single bridge in Iran if Tehran did not agree to Washington’s terms to end the conflict. This raises the risk of a further escalation of tensions in the Middle East and benefits the USD's global reserve currency status.

Meanwhile, the latest developments trigger a sharp rally in Crude Oil prices and revive inflationary concerns. This pushes US bond yields higher and further supports the buck. The USD bulls, however, seem reluctant on the back of diminishing odds for a rate hike by the US Federal Reserve (Fed). This marks a significant divergence in comparison to bets on a rate hike by the Bank of England (BoE), which acts as a tailwind for the British Pound (GBP) and the GBP/USD pair.

(This story was corrected on April 20 at 02:43 GMT to say that the current US-Iran ceasefire ends on April 22, not April 21.)

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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