Pound Sterling rises as sentiment improves on lower oil prices

Pound Sterling strengthens amid optimism that the Middle East conflict may have a smaller impact on inflation.
Market sentiment improved as oil prices cooled on reports that IEA may release record reserves to stabilize markets.
Standard Chartered and Morgan Stanley expect the BoE to begin cutting interest rates in the second quarter.

Akhtar Faruqui FXStreet

GBP/USD gains ground after registering little losses in the previous session, trading around 1.3450 during the Asian hours on Wednesday. The Pound Sterling (GBP) strengthens against its peers amid optimism that the Middle East conflict may have a smaller impact on inflation than initially feared.

Market sentiment improved as oil prices cooled after the Wall Street Journal reported that the International Energy Agency (IEA) is considering its largest-ever oil reserve release to stabilize markets. The proposed drawdown would exceed the 182 million barrels released in 2022 following Russia’s invasion of Ukraine.

Investor confidence also improved after US President Donald Trump said the conflict could end quickly and announced that the US Navy would escort tankers through the Strait of Hormuz to protect key shipping routes.

Meanwhile, expectations for Bank of England (BoE) policy have shifted, with traders again leaning toward potential rate cuts. Standard Chartered and Morgan Stanley now expect the BoE to begin cutting interest rates in the second quarter, delaying earlier forecasts amid inflation risks linked to the Middle East conflict. The recent surge in energy prices has raised concerns about inflation, which could force central banks, including the BoE, to adjust their easing paths.

Markets are currently pricing a 98% probability that the BoE will keep rates unchanged this month, according to data compiled by London Stock Exchange Group (LSEG). The British brokerage has pushed its expected March rate cut to the second quarter and reduced its forecast for subsequent cuts by a quarter point, leaving the terminal rate at 3.25% by the end of 2026, Reuters reported.

The GBP/USD pair also advances as the US Dollar (USD) remains subdued ahead of the US Consumer Price Index (CPI) data due later in the day. However, the Greenback could regain ground on rising safe-haven demand amid growing uncertainty surrounding the Middle East conflict. Trump said late Monday that the conflict could end soon, though US officials indicated on Tuesday that military operations in Iran were intensifying, with limited prospects for diplomatic negotiations. Meanwhile, Iran’s Revolutionary Guards warned that the Strait of Hormuz blockade would continue until US and Israeli attacks cease.

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

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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