British Pound weakens below 1.3450 as US-Iran uncertainty boosts safe-haven US Dollar
- GBP/USD softens to around 1.3425 in Tuesday’s early Asian session.
- Trump insists Iran talks are underway; Iran denies any negotiations taking place.
- US ISM Manufacturing PMI rose to 55.6 in July, stronger than expected.
The GBP/USD pair loses ground to near 1.3425 during the early Asian session on Tuesday. Uncertainty surrounding US-Iran talks drives traders toward a safe-haven currency such as the US Dollar (USD) against the British Pound (GBP). All eyes will be on the US July jobs data, which is due later on Friday.
US President Donald Trump on Monday claimed talks with Iran are ongoing, saying this is Tehran’s “last chance to sign a good document”. Trump added that he expected negotiations to begin in the next day or two to reopen the Strait of Hormuz and create a pathway for Iran to address the US’s concerns about its nuclear programme.
However, Tehran denied that talks with the US were taking place. Iran’s Foreign Ministry Spokesperson, Esmaeil Baghaei, stated that the country’s current focus was on negotiations with Oman over the Strait of Hormuz.
Furthermore, the upbeat US economic data provide some support to the Greenback and create a headwind for the major pair. Data released by the Institute for Supply Management (ISM) on Monday showed that the US Manufacturing Purchasing Managers' Index (PMI) rose to 55.6 in July, up from 53.3 in June. This figure came in stronger than the market expectation of 54.0.
Last week, the Bank of England (BoE) voted 6-3 to hold the interest rates steady at 3.75%, with three policymakers favoring a rate hike. BoE Governor Andrew Bailey pushed back against expectations of an imminent tightening cycle, saying the disinflation process remains intact. Markets are now pricing in just one rate hike by the end of the year, while renewed US-Iran hostilities continue to add uncertainty to the economic outlook.
Pound struggles for support as BoE hawkish split meets Bailey’s dovish tone
Analysts at Rabobank highlight that “GBP net shorts bounced higher last week ahead of the BoE policy meeting,” underscoring a build-up in speculative bearish positioning on the Pound. They note that, despite “a more hawkish voting split than the market had expected from the MPC,” Governor Bailey’s “dovish” tone ultimately “suggest[ed] little support for the pound from the BoE,” leaving sentiment towards the currency constrained.
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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