Pound Sterling softens to near 1.3300 as Middle East conflict fuels US Dollar strength

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GBP/USD weakens to around 1.3300 in Monday’s early Asian session.
Trump vowed control over Iran's new leader, raising fears of a prolonged war.
US NFP unexpectedly fell by 92,000 in February; the Unemployment Rate rose to 4.4%.

The GBP/USD pair attracts some sellers to near 1.3300 during the early Asian session on Monday. Escalating hostilities in the Middle East boost a safe-haven currency such as the US Dollar (USD) against the Pound Sterling (GBP). Traders will take more cues from the US February Consumer Price Index inflation report (CPI) later on Wednesday.

Iran named Mojtaba Khamenei as the country’s new supreme leader just over a week after his father, Ayatollah Ali Khamenei, was killed in US-Israeli strikes, per CNBC. Meanwhile, US President Donald Trump said that he would exert influence over Iran’s next supreme leader, saying that whoever is picked for the role without Washington’s approval is “not going to last long."

Signs of a prolonged war in the Middle East continue to support the Greenback and create a headwind for the major pair in the near term. “The dollar is the biggest beneficiary in the current environment, given the USD’s safe haven status and the US’ position as a net energy exporter,” said Carol Kong, a strategist at Commonwealth Bank of Australia in Sydney. “How much higher the dollar will go from here depends on the depth and duration of the conflict, which remains highly uncertain.”

On the other hand, a disappointing US employment report might cap the downside for GBP/USD. US Nonfarm Payrolls (NFP) fell by 92,000 in February, compared to the market consensus of a rise of 59,000 and the downwardly revised January total of 126,000. The Unemployment Rate edged higher to 4.4% during the same period as jobs declined across key areas.

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.