GBP/USD inches higher after four days of losses, trading around 1.3260 during the Asian hours on Monday. However, risk-sensitive currency pairs, including GBP/USD, found some support after the Guardian reported that US Energy Secretary Chris Wright expects the US-Israel conflict with Iran to end within “the next few weeks,” which could allow oil supplies to recover and energy prices to ease.
Still, the Pound Sterling (GBP) may remain under pressure due to its exposure to rising energy costs. Investors are also assessing weak UK economic data alongside the escalating Middle East conflict and the potential implications for Bank of England (BoE) policy.
Data from the Office for National Statistics (ONS) showed that the UK economy stalled in January, missing expectations for 0.2% growth as services activity remained flat and production declined by 0.1%. Despite the sluggish growth outlook, surging energy prices have prompted investors to price in a 25-basis-point Bank of England rate hike by the end of the year.
Furthermore, the GBP/USD pair may extend its losses as the US Dollar (USD) could strengthen further on safe-haven demand amid ongoing tensions in the Middle East and rising oil prices. Over the weekend, US forces reportedly targeted every military site on Kharg Island, a key Iranian oil export hub. While US President Donald Trump stated that oil infrastructure was not struck, Iran has warned it could retaliate against any US-linked oil facilities in the region.
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.
