GBP/USD extends its losses for the second day in a row, reaching a level of around 1.3460 during Asian hours on Friday. The currency pair is underperforming as the U.S. dollar (USD) draws support from a secure haven amid escalating geopolitical conflicts in the Middle East, just ahead of July’s preliminary Michigan Consumer Sentiment Index.
Concerns over energy supplies have increased following a Reuters report that said Iran has instructed Yemen’s Houthi militia to block a critical oil route through the Red Sea if the United States strikes at Iran’s energy infrastructure. Moreover, Tasnim news agency reported explosions in Bandar Abbas, Qeshm and Ahvaz, while distinct explosions were also heard as far as Kuwait and Basra.
However, the dollar’s upward momentum faces obstacles in the form of cooling US economic data, which prompted investors to limit expectations for short-term interest rate increases from the Federal Reserve. The latest data revealed that June consumer inflation rose less than expected and producer prices unexpectedly fell even as jobless claims fell to their lowest level in two months. While markets have effectively ruled out a Fed rate hike this month, investors remain deeply divided over the likelihood of a change in monetary policy in September.
Earlier this week, Bank of England (BoE) Governor Andrew Bailey expressed concern about the recent resumption of hostilities between the US and Iran, but noted that frictions have not yet materially changed the UK’s inflation outlook. Money markets continue to fully price in a BoE rate hike by the November policy meeting, with a second enhance expected in April 2027, according to Reuters data.
Sterling FAQs
The pound sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. As of 2022, it is the fourth most traded currency unit in the world, accounting for 12% of all transactions, with an average value of $630 billion per day. Its key trading pairs are GBP/USD, also known as “The Cable”, which makes up 11% of FX, GBP/JPY or “The Dragon” as traders call it (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).
The most significant factor influencing the value of the pound sterling is the monetary policy pursued by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a constant inflation rate of around 2%. The basic tool to achieve this goal is to adjust interest rates. When inflation gets too high, the BoE will try to contain it by raising interest rates, making access to credit more pricey for citizens and businesses. 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 that economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to lower borrowing prices so that companies borrow more to invest in projects that generate economic growth.
The published data are used to assess the condition of the economy and may affect the value of the pound sterling. Indicators such as GDP, manufacturing and services PMIs and employment can influence the direction of the GBP exchange rate. A sturdy economy is good for sterling. Not only will it attract more foreign investment, but it may prompt the BoE to raise interest rates, which will directly strengthen the British pound. Otherwise, if economic data is feeble, sterling is likely to fall.
The next significant data release for the pound sterling is the trade balance. This indicator measures the difference between what a country earns from exports and what the country spends on imports over a given period. If a country produces a highly sought after export, its currency will only benefit from the additional demand created by foreign buyers willing to buy those goods. Therefore, a positive net trade balance strengthens the currency and vice versa in the case of a negative balance.
