Pound Sterling slumps as Middle East tensions diminish appeal for risky assets
- The Pound Sterling falls sharply against its major peers as Israel’s attack on Iran dampened demand for risky assets.
- Both the Fed and the BoE are expected to maintain interest rates steady next week.
- Investors expect the BoE to reassess its “gradual and cautious” monetary expansion guidance due to recent weak economic data.
The Pound Sterling (GBP) underperforms against its major peers on Friday, except for antipodean currencies, as market sentiment turns risk-averse amid escalating geopolitical tensions in the Middle East.
Israel has announced a war against Iran after striking dozens of targets in the northeast region of Tehran, including nuclear facilities and military bases. Israeli Prime Minister Benjamin Netanyahu has clarified that their military has started the “Operation Rising Lion” to stop Iran from building nuclear warheads, citing that the operation aims to “roll back the Iranian threat to Israel’s very survival”.
US President Donald Trump also said earlier in the day that Iran “cannot have a nuclear bomb”, partly endorsing Israel’s attack
Escalating tensions between Tel Aviv and Tehran have led investors to turn to safe-haven assets such as the US Dollar (USD). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is up 0.45% to near 98.30, recovering sharply from the three-year low of 97.60 posted on Thursday.
Apart from geopolitical headlines, the next triggers for the GBP/USD pair will be the monetary policy announcements by both the Federal Reserve (Fed) and the Bank of England (BoE) next week. Both central banks are expected to hold interest rates steady.
Daily digest market movers: Pound Sterling weakens as Middle East attacks weigh
- The Pound Sterling slumps to near 1.3530 against the US Dollar during European trading hours on Friday. The GBP/USD pair faces sharp selling pressure as investors turn risk-averse amid escalating Middle East tensions.
- Earlier in the day, the US clarified that they have no involvement in the Israel-Iran conflict and assured that Washington would seek talks with Tehran to end tensions peacefully. However, Tehran has refused to join the US at the table. Senior Iranian lawmaker Boroujerdi said that the sixth round of talks with the US “will not be held following the Israeli attacks”, according to Iran International.
- Next week, the US Dollar’s valuation will be influenced by the outcome of the Fed’s policy meeting on Wednesday. According to the CME FedWatch tool, the Fed is expected to leave interest rates steady in the current range of 4.25%-4.50%.
- Traders are increasingly confident that the Fed will avoid any monetary policy adjustments as policymakers have guided that interest rates should remain at their current levels until they get clarity about how the new economic policies announced by US President Trump will impact inflation and the economic outlook.
- Investors will closely monitor the Fed’s dot plot, which shows where officials expect interest rates to head in the near and longer term. The CME FedWatch tool shows that the Fed will reduce interest rates in the September meeting. Traders are currently expecting the Federal Reserve to cut rates by 55 basis points by the year-end, which means around two 25-basis-point cuts, Reuters reported.
- In the United Kingdom (UK), the BoE is also anticipated to leave interest rates unchanged at 4.25% on Thursday. However, market participants expect the central bank to reassess its “gradual and careful” policy easing guidance amid slowing labor demand and an economic contraction in the monthly Gross Domestic Product data for April.
- This week, the Office for National Statistics (ONS) reported that the Unemployment Rate rose to 4.6% in the three months ending April, the highest level seen since July 2021, and employers added fewer jobs in the same period. Cracks emerged in the labor market after employers’ contribution to the National Insurance (NI) increased to 15% from 13.8% in April.
- Meanwhile, the UK economy declined at a faster-than-projected pace of 0.3% in April, and the factory data contracted sharply.
- Ahead of the BoE’s monetary policy announcement, investors will focus on the UK Consumer Price Index (CPI) data for May, which is scheduled to be released on Wednesday.
Technical Analysis: Pound Sterling stays above 20-day EMA
The Pound Sterling falls sharply to near 1.3530 against the US Dollar after facing selling pressure near the three-year high around 1.3630. Despite the pullback, the near-term trend of the GBP/USD pair remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 1.3490.
The 14-day Relative Strength Index (RSI) falls below 60.00 and points downwards, signaling a quick loss of bullish momentum. Still, this could resume if the RSI is able to retake the 60 level.
On the upside, the January 13, 2022, high of 1.3750 will be a key hurdle for the pair. Looking down, the horizontal line plotted from the September 26 high of 1.3434 will act as a key support zone.
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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