GBP/USD attracts some buyers above 1.3550 after Middle East ceasefire
- GBP/USD strengthens to near 1.3560 in Tuesday’s early European session.
- Dovish Fed comments undermine the US Dollar.
- Trump announced a complete and total ceasefire between Israel and Iran.
The GBP/USD pair gains traction to around 1.3560 during the early European session on Tuesday, bolstered by the weaker US Dollar (USD). Traders will closely watch the Bank of England's (BoE) Governor Bailey speech, along with the Federal Reserve's (Fed) Chair Jerome Powell’s semiannual testimonies later on Tuesday.
Federal Reserve (Fed) Governor Michelle Bowman said Monday she would favor an interest rate reduction at the next policy meeting in July so long as inflation pressures stay muted. Bowman's comments echo those of Fed Governor Christopher Waller, who said on Friday that he believes the US central bank could consider a rate cut in July.
Dovish remarks from the Fed officials could weigh on the Greenback and act as a tailwind for the major pair in the near term. Traders are now pricing in nearly a 23% chance of a move at the July meeting, with the possibility of about 78% that the Fed will cut in September, according to the CME Group’s FedWatch tool.
On the other hand, the uncertainty surrounding a ceasefire between Israel and Iran and renewed tensions in the Middle East could boost the safe-haven flows, supporting the Pound Sterling (GBP). The Israel Defense Forces (IDF) said early Tuesday that it has identified missiles launched from Iran toward southern Israel, even though US President Donald Trump stated that a "complete and total" ceasefire between Israel and Iran will go into effect.
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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