British Pound nudges higher as traders await progress on Middle East peace talks
- GBP/USD posts modest gains near 1.3460 in Tuesday’s Asian session.
- The potential upside for the pair might be limited as the status of Iran's peace talks remains unclear.
- US ISM Manufacturing PMI rose to 54 in May, stronger than expected.
The GBP/USD pair trades in positive territory around 1.3460 during the Asian trading hours on Tuesday. However, renewed tensions in the Middle East might cap the upside for the major pair as Iran has reportedly withdrawn from negotiations with the US. Traders will closely monitor the developments surrounding Middle East peace talks.
Iran’s state media said Tehran on Monday had suspended talks over Israel’s actions in Lebanon. Separately, US President Donald Trump stated that he believes an agreement to reopen the Strait of Hormuz and extend the ceasefire with Iran is reachable “over the next week.” Mixed signals and uncertainty in the Middle East could boost a safe-haven currency such as the Greenback and create a headwind for the major pair in the near term.
Data released by the Institute for Supply Management (ISM) on Monday showed that the US Manufacturing Purchasing Managers' Index (PMI) rose to 54 in May from 52.7 in April. This figure came in better than the market expectation of 53.0.
On the UK’s front, BoE governor Andrew Bailey said on Friday that the UK central bank is in no rush to raise interest rates while the outcome of the Iran war remains uncertain and the UK’s growth rate stays weak. Money market futures now imply 32 basis points (bps) of tightening this year, one quarter-point hike, and roughly a 30% chance of a second, according to Reuters.
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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