British Pound holds steady near 1.3450 as US-Iran strikes intensify

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The GBP/USD pair trades on a flat note around 1.3450 during the early Asian session on Monday. Traders continue to assess the developments surrounding US-Iran tensions after the US said that a third American troop was killed in the past two days.

GBP/USD flatlines near 1.3450 in Monday’s early Asian session.
The US launched a new wave of Iran strikes on Sunday, extending its military campaign into a ninth straight night.
Andy Burnham becomes UK Labour leader, the last step before taking over as Prime Minister.

The US reported the death of another American service member, who was killed in northern Iraq during the controlled detonation of a downed Iranian drone. US Central Command (CENTCOM) also said on Sunday that it has located unidentified remains in Jordan, where a separate Iranian attack left two US troops dead and one missing in action, per Bloomberg.

A week of back-and-forth strikes has expanded beyond strictly military targets to include bridges, utilities, and port facilities, raising fears of a prolonged conflict in the Middle East. This, in turn, could weigh on riskier assets, such as the British Pound (GBP), against the US Dollar (USD) in the near term.

However, signs of softer US consumer and producer inflation have dampened the US Federal Reserve (Fed) rate-hike bets, which might cap the upside for the Greenback. The chance for a Fed rate hike in July stood at 14%, versus a 25% implied odds last week, according to the CME FedWatch tool. Traders are pricing in 30 basis points (bps) of hikes by December.

The probability for a Fed rate hike in July stood at 14%, versus a 25% implied chance last week, according to the CME FedWatch tool. Traders are pricing in 30 basis points (bps) of hikes by December.

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.

Andy Burnham was elected leader of the UK's governing Labour Party on Friday, the final step before becoming the 59th Prime Minister of the UK. Burnham formally succeeds Sir Keir Starmer, who resigned following a collapse in public polling and substantial losses for the Labour Party in the recent local elections.

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