Pound Sterling weakens to near 1.3300 as geopolitical risks bolster US Dollar
- GBP/USD drifts lower to near 1.3310 in Wednesday’s early European session.
- Rising Middle East geopolitical tensions boost the US Dollar, a safe-haven currency.
- Markets have scaled back bets for a March rate cut by the BoE as oil-driven inflation concerns persist.
The GBP/USD pair attracts some sellers to around 1.3310 during the early European session on Wednesday. Escalating conflict in the Middle East triggers a "flight to safety," supporting the US Dollar (USD) against the Pound Sterling (GBP). Traders will take more cues from the US ADP Employment and ISM Services Purchasing Managers Index (PMI) reports, which are due later on Wednesday.
US President Donald Trump said the war was the "last best chance" of addressing the threat posed by Iran's ballistic missiles and nuclear program and that the campaign could last four to five weeks with the "capability to go far longer than that.”
Iran continues retaliatory attacks on Israel and US targets in the Middle East, with strikes reported on the US embassy in Dubai and a port in the city of Fujairah in the United Arab Emirates. Traders retreat from riskier assets due to the US–Israel conflict with Iran, weighing on the Cable.
On the other hand, surging oil and gas prices due to Middle East conflicts have fueled fresh inflation fears, causing traders to scale back bets on further easing by the Bank of England (BoE). This, in turn, might help limit the GBP’s losses. The probability of a BoE rate reduction later this month has also plunged, from about 80% last week to less than 20% now, according to Bloomberg.
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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