GBP/USD pares recent losses from the previous session, trading around 1.3370 during the Asian hours on Friday. The pair strengthens as the US Dollar Index (DXY) retreats after gaining nearly 0.5% on Thursday. However, the US Dollar could regain support amid escalating geopolitical tensions in the Middle East.
Traders are likely awaiting another key US inflation release. January’s Personal Consumption Expenditures Price Index (PCE), the preferred inflation gauge of the Federal Reserve (Fed), is due later in the day, though it will not reflect the impact of the Iran war. Markets will also monitor the first revision of fourth-quarter US GDP growth and March consumer confidence.
Safe-haven demand for the Greenback remains supported by surging oil prices. Iran’s new supreme leader, Mojtaba Khamenei, said in his first public remarks since his appointment that the closure of the Strait of Hormuz should continue as a “tool to pressure the enemy.” Khamenei also warned that all US military bases in the region should be closed immediately or face potential attacks.
Futures markets and economists expect the Federal Reserve to keep interest rates unchanged at next week’s policy meeting, with the benchmark federal funds rate currently at 3.50%–3.75%.
Meanwhile, markets are increasingly confident that the Bank of England (BoE) will cut interest rates at next week’s policy meeting. However, rising inflationary pressure from higher oil prices has clouded the outlook, prompting expectations that policymakers may remain cautious and potentially delay rate cuts.
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.
