Pound Sterling weakens as Middle East tensions drive oil surge and USD safe-haven demand

GBP/USD weakens to near 1.3315 in Monday’s early European session.
Soaring oil prices amid the US-Israel war on Iran raise fears of stagflation and boost the US Dollar, a safe-haven currency.
BoE decided to hold interest rates steady at 3.75%, signaling rising inflation risks.

Lallalit Srijandorn FXStreet

The GBP/USD pair attracts some sellers to around 1.3315 during the early European session on Monday, dragged by a firmer US Dollar (USD). The preliminary readings of Purchasing Managers Index (PMI) from the United Kingdom (UK) and the United States (US) will be released later on Tuesday.

Escalating war in the Middle East has pushed Brent crude oil prices above $100 per barrel. This has triggered safe-haven demand for the Greenback and increased inflationary pressure globally. Iranian officials vowed retaliation across the region if US President Donald Trump carries out a threat to bomb Iran’s power plants. This remark came as Trump said Saturday he would order the bombardment if the Strait of Hormuz was not fully open to shipping within 48 hours.

The Bank of England (BoE) held rates at 3.75% last week. The UK central bank warned that this "shock to the economy" will likely push UK inflation higher in the short term, even as growth forecasts for 2026 are slashed. Furthermore, disappointing labor market data, including a rise in the unemployment rate, dented traders' confidence in the GBP

The UK government stated that UK Prime Minister Keir Starmer, Bank of England (BoE) Governor Andrew Bailey, and Finance Minister Rachel Reeves are scheduled to attend an emergency meeting on the economic fallout from the war in Iran on Monday.

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

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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