Pound Sterling declines as US Dollar gains on increased risk aversion

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GBP/USD depreciates after registering modest gains in the previous session, trading around 1.3300 during the Asian hours on Monday. The pair weakens as the US Dollar (USD) gains on safe-haven demand amid escalating Iran war with no clear resolution in sight.

GBP/USD weakens as safe-haven demand lifts the US Dollar amid escalating Iran war tensions.
Mojtaba Khamenei was named Iran’s supreme leader, signaling continued hardline control of the country.
Rising energy prices boost UK inflation concerns, reducing expectations for a BoE rate cut this month.

Mojtaba Khamenei was named Iran’s new supreme leader just over a week after his father, Ayatollah Ali Khamenei, was killed in US-Israeli strikes, signaling that hardliners remain firmly in control of the country. Last week, US President Donald Trump said the appointment would be “unacceptable” and suggested that Washington should have a role in selecting Iran’s next supreme leader.

The US Dollar draws support as surging crude Oil prices, fueled by concerns that a prolonged Middle East conflict could disrupt global energy supplies over the longer term. West Texas Intermediate (WTI) Oil price surges above $111.00 per barrel at the time of writing. President Trump said the increase in oil prices is a “very small price to pay” for defeating Iran and ensuring global peace.

The Greenback also receives additional support as traders revise inflation expectations following the outbreak of hostilities last week, strengthening bets that the Federal Reserve (Fed) could delay interest rate cuts.

Rising energy prices are increasing inflation concerns in the United Kingdom (UK), reducing expectations of a Bank of England (BoE) rate cut this month, with futures markets signaling no further policy changes for the rest of the year.

Meanwhile, UK Prime Minister Keir Starmer reaffirmed his decision not to join the initial US-Israel strikes on Iran, emphasizing diplomacy. Over the weekend, Trump dismissed reports that the UK planned to deploy the aircraft carrier HMS Prince of Wales to the Middle East, calling Britain a “once great ally.”

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.