The GBP/USD pair gathers strength near 1.3290 during the early European trading hours on Thursday. However, the potential upside for the major pair might be limited amid the ongoing conflict in the Middle East and the hawkish tone from the US Federal Reserve (Fed). All eyes will be on the UK employment report and the Bank of England (BoE) interest rate decision on Thursday.
The ongoing conflict in the Middle East has pushed the WTI price to near $100 a barrel, strengthening the US Dollar as a safe-haven currency. Bloomberg reported on Wednesday that Iran and Israel traded strikes on key energy facilities in the Middle East. The strike followed a warning from Iran’s Islamic Revolutionary Guard Corps (IRGC) hours earlier that several energy sites in Gulf countries would be considered “legitimate targets” after Israel attacked South Pars gas field facilities.
The Fed decided to hold interest rates steady at 3.50%–3.75% at its March policy meeting. While a Summary of Economic Projections (SEP), or so-called “dot plot,” still suggested one potential rate cut in 2026, Fed Chair Jerome Powell said that surging energy prices from the conflict in the Middle East have made the inflation outlook highly uncertain.
The BoE is widely expected to maintain its interest rate at 3.75% on Thursday. Bank of America economists now expect two Bank Rate cuts in June and September, delayed from its previous forecast of March and June. The UK jobs data will be closely watched on Thursday. The ILO Unemployment Rate is projected to rise to 5.3% in January from 5.2% in December.
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.
