Pound Sterling trades sideways against US Dollar amid Israel-Iran conflict
- The Pound Sterling wobbles around 1.3565 against the US Dollar, with investors seeking fresh cues on the Israel-Iran war outlook.
- Investors expect the Fed and the BoE to leave interest rates steady this week.
- The UK inflation is expected to have grown moderately in May.
The Pound Sterling (GBP) trades in a limited range around 1.3565 against the US Dollar (USD) during European trading hours on Tuesday. The GBP/USD pair consolidates as the US Dollar (USD) turns sideways, while investors seek fresh cues on the future of the conflict between Israel and Iran.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, wobbles around 98.15.
Earlier in the day, a report from Reuters showed that Iran sought after its Middle East peers to urge United States (US) President Donald Trump to push Israeli Prime Minister Benjamin Netanyahu for an immediate ceasefire.
Following Tehran’s urge, Trump has asked US Vice President JD Vance and the Middle East envoy to push for meeting with the Iranians this week at the sidelines of the G7 meeting, The New York Times reported.
Meanwhile, the tussle between Iran and Israel enters its fifth day. The Israeli military said during late Asian hours on Tuesday that they had identified missiles launched from Iran toward Israel, according to the BBC News.
The demand for safe-haven assets, such as the US Dollar, increases amid heightening geopolitical tensions.
Daily digest market movers: Pound Sterling ranges againt US Dollar
- Another reason behind the sideways trend between the Pound Sterling and the US Dollar is the upcoming monetary policy announcements by the Federal Reserve (Fed) and the Bank of England (BoE), which are scheduled for Wednesday and Thursday, respectively.
- According to the CME FedWatch tool, the Fed is almost certain to leave interest rates steady in the range of 4.25%-4.50% this time. Traders are increasingly confident that the central bank will keep borrowing rates on hold as officials have stated that monetary policy adjustments are inappropriate until they get clarity on how much new economic policies will impact inflation and affect the outlook.
- The major highlight of the Fed’s policy will be the dot plot, which shows where officials see interest rates heading in the near and long term. In the last release of the dot plot in March, officials anticipated at least two interest rate cuts by the year-end. Apart from that, investors will also focus on the monetary policy statement and Fed Chair Jerome Powell’s press conference to know when the central bank could start reducing interest rates.
- In Wednesday’s monetary policy announcement, the Fed will also show forecasts on inflation and economic growth. It will be interesting to watch the degree of change in these key economic triggers amid the implementation of new policies by US President Trump.
- In the United Kingdom (UK), the Bank of England (BoE) is also expected to keep interest rates steady at 4.25% as officials guided a “gradual and cautious” monetary easing approach in thMay’s policy meeting, following an interest rate reduction by 25 basis points (bps).
- However, market participants expect that the BoE could reassess its monetary policy guidance, given recent cracks in the UK labor market. Latest employment data showed an increase in the Unemployment Rate and slower job growth as business owners reduced labor force to offset the impact of an increase in employers’ contribution to social security schemes.
- Ahead of the BoE monetary policy announcement, investors will focus on the UK Consumer Price Index (CPI) data for May, which will be released on Wednesday. The inflation data is expected to show that price pressures have cooled down.
Technical Analysis: Pound Sterling consolidates below 1.3600
The Pound Sterling wobbles inside Monday’s trading range around 1.3565 against the US Dollar on Tuesday. The GBP/USD pair struggles to revisit the three-year high around 1.3630. The near-term trend of the Cable remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 1.3508.
The 14-day Relative Strength Index (RSI) struggles to break decisively above 60.00. A fresh bullish momentum would emerge if the RSI holds above that level.
On the upside, the 13 January 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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