Pound Sterling softens as focus shifts to possible US–Iran negotiations
- GBP/USD edges lower to around 1.3520 in Friday’s early European session.
- The UK economy showed a surprise 0.5% growth before the Iran war.
- Trump said the next meeting between Washington and Tehran could take place over the weekend.
The GBP/USD pair trades with mild losses near 1.3520 during the early European trading hours on Friday. The Cable softens against the US Dollar (USD) despite the stronger-than-expected UK economic data. Traders will closely monitor a second round of talks between the US and Iran that could take place this weekend.
The UK Gross Domestic Product (GDP) expanded by 0.5% MoM in February, beating economists' forecasts of just 0.1%, the Office for National Statistics showed. This reading suggested the UK economy was gaining momentum. Nonetheless, analysts at Deutsche Bank and ING warned that this momentum is likely "stale data" that has already been extinguished by the onset of the Iran war at the end of February.
Bank of England (BoE) Governor Andrew Bailey said that the world is facing a "very big energy shock" that will push up prices, adding that the UK central bank would not rush to make a decision on interest rate rises. On Wednesday, the International Monetary Fund (IMF) warned that the BoE should not rush to hike borrowing costs in the wake of the Middle East conflict.
US President Donald Trump said on Thursday that the US and Iran are "very close" to making a deal and that negotiations could resume as early as this weekend. His remarks came as a 10-day ceasefire between Israel and Lebanon had taken effect. This, in turn, could lift a riskier asset such as the Pound Sterling (GBP) against the Greenback.
Pound Sterling FAQs
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).
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.
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.
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.
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