British Pound seems vulnerable near two-week low vs USD; GBP/USD holds above 1.3500

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GBP/USD languishes near a two-week low amid a combination of negative factors.
The UK political turmoil continues to undermine the GBP and weigh on spot prices.
The USD benefits from Fed rate hike bets and Iran tensions, favoring bearish traders.

The GBP/USD pair struggles to capitalize on the previous day's late bounce from the 1.3500 psychological mark, or a nearly two-week low, and oscillates in a narrow band during the Asian session on Wednesday. Spot prices remain below the 1.3550 level and seem vulnerable to weaken further amid a combination of negative factors.

The British Pound (GBP) continues to be undermined by a severe political crisis in the UK, with over 80 Labour MPs calling for Prime Minister Keir Starmer to resign following disastrous local election results. The US Dollar (USD), on the other hand, is seen consolidating the previous day's strong gains to an over one-week high as hot US inflation data reaffirmed bets for a rate hike by the Federal Reserve (Fed). These turn out to be key factors acting as a headwind for the GBP/USD pair.

The US Bureau of Labor Statistics (BLS) reported on Tuesday that the headline US Consumer Price Index (CPI) rose 3.8% in the 12 months through April, marking the biggest year-on-year increase since May 2023. Moreover, the core gauge, which excludes volatile food and energy prices, climbed 0.4% and 2.8% on a monthly and yearly basis, respectively. Traders were quick to react and are now pricing in roughly a 35% chance of a 25-basis-point hike by the December 2026 meeting.

This comes on top of fading hopes for a US-Iran peace deal and further underpins the USD's reserve currency status, backing the case for a further near-term depreciating move for the GBP/USD pair. In the latest development surrounding the Middle East crisis, US President Donald Trump said that the ceasefire with Iran was "on life support", while Tehran rejected a US proposal to end the war amid major disagreements over its nuclear program and the critical Strait of Hormuz.

Traders now look forward to the release of the US Producer Price Index (PPI) for a fresh impetus later during the early North American session. Apart from this, the incoming geopolitical headlines might continue to infuse volatility in the financial markets and produce short-term trading opportunities around the GBP/USD pair. Nevertheless, the fundamental backdrop favors bearish traders and suggests that the path of least resistance for spot prices is to the downside.

Pound Sterling FAQs

What is the Pound Sterling?

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).

How do the decisions of the Bank of England impact on the Pound Sterling?

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.

How does economic data influence the value of the Pound?

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.

How does the Trade Balance impact the Pound?

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.