British Pound weakens as US Dollar advances on rising risk aversion

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GBP/USD extends its losses for the second successive day, trading around 1.3460 during the Asian hours on Friday.

GBP/USD gains as the US Dollar gains on geopolitical tensions and conflicts escalate in the Middle East.
Softer US inflation and falling producer prices have led markets to rule out a near-term Fed rate hike.
Money markets still fully price a November BoE rate hike, with a second interest rate increase projected by April 2027.

GBP/USD extends its losses for the second successive day, trading around 1.3460 during the Asian hours on Friday. The currency pair underperforms as the US Dollar (USD) draws safe-haven support from intensifying geopolitical conflicts in the Middle East, just ahead of the preliminary Michigan Consumer Sentiment Index for July.

Energy supply anxieties spiked following a Reuters report stating that Iran has instructed Yemen’s Houthi militia to block the critical Red Sea oil route if the United States strikes Iranian power infrastructure. Compounding these fears, the Tasnim news agency reported explosions in Bandar Abbas, Qeshm, and Ahvaz, while distinct blasts were also heard as far away as Kuwait and Basra.

However, the Greenback’s upward momentum faces headwinds from cooling US economic data, which has prompted traders to scale back expectations for near-term Federal Reserve rate hikes. Recent data revealed that June consumer inflation rose less than anticipated and producer prices unexpectedly declined, even as initial jobless claims dropped to a two-month low. While markets have effectively ruled out a Fed rate hike this month, investors remain deeply divided over the likelihood of a policy move in September.

Earlier this week, Bank of England (BoE) Governor Andrew Bailey expressed concern over the recent resurgence of hostilities between the US and Iran, though he noted that the friction has not yet materially altered the UK inflation outlook. According to Reuters data, money markets are still fully pricing in a BoE rate hike by the November policy meeting, with a second increase projected by April 2027.

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.