Pound Sterling declines against US Dollar as US ground invasion plans underpin risk-off mood
- The Pound Sterling trades weakly against the US Dollar at the start of the week amid weak demand for riskier assets.
- Iran releases fiery warning against potential US ground attacks.
- Investors await key US economic releases, notably the US NFP data.
The Pound Sterling (GBP) trades lower against the US Dollar (USD) at around 1.3240 in the opening trade at the start of the week, the lowest level seen in almost two weeks. The GBP/USD pair faces selling pressure as fears of a potential United States (US) ground invasion in Iran have weighed on demand for riskier assets.
During the press time, S&P 500 futures are 0.5% down, reflecting a dismal market sentiment. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extends its winning streak for the fifth trading day on Monday, rising to near 100.35.
Late Thursday, a Wall Street Journal (WSJ) report showed that the US Pentagon is considering sending 10,000 additional troops to Iran. In response, Iran’s Brigadier General Ebrahim Zolfaqari has issued a stark warning on the Iranian state TV, saying that “US troops will be good food for sharks of the Persian Gulf”.
Fear of further widening of Middle East conflicts prompts risks of persistently higher oil prices, a scenario that is unfavorable for currencies from economies, such as the United Kingdom (UK), that rely heavily on oil imports to meet their energy needs.
On the macro front, major triggers for the GBP/USD pair will be key US economic data releases this week, which include various labor market-linked indicators, especially the Nonfarm Payrolls, and the ISM Purchasing Managers’ Index (PMI) data, which will influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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