British Pound holds positive bias above 1.3450 vs USD; upside potential seems limited

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GBP/USD edges higher on Wednesday, reversing a part of the previous day’s corrective slide.
US-Iran peace deal hopes and easing inflation fears undermine the USD, supporting the pair.
Hawkish Fed expectations limit USD losses, while delayed BoE rate hike bets to cap the GBP.

The GBP/USD pair attracts some dip-buyers during the Asian session on Wednesday and stalls the previous day's retracement slide from the vicinity of a nearly two-week top, levels just above the 1.3500 psychological mark. Spot prices currently trade just above mid-1.3400s, though the upside potential seems limited amid persistent geopolitical uncertainties.

Renewed US attacks on Iran dented hopes for an imminent deal to end a three-month-old Middle East conflict. Iran’s Foreign Ministry condemned the US attacks as a violation of a ceasefire that’s been in place since early April. Furthermore, the Islamic Revolutionary Guard Corps (IRGC) threatened to retaliate, keeping geopolitical risk premium in play. This, along with hawkish US Federal Reserve (Fed) expectations, might continue to act as a tailwind for the safe-haven US Dollar (USD) and keep a lid on the GBP/USD pair.

Despite the standoff, investors remain optimistic about tentative progress in US-Iran diplomatic talks. This eases fears of severe energy supply disruptions and remains supportive of a positive risk tone. Furthermore, a modest downtick in Crude Oil prices eases inflationary concerns and caps gains for the Greenback, lending support to the GBP/USD pair. That said, a combination of factors might hold back traders from placing aggressive bullish bets around the British Pound (GBP) and act as a headwind for the currency pair.

Traders pushed back their expectation for the likely timing of the next interest rate hike by the Bank of England (BoE) after the UK Consumer Price Inflation (CPI) unexpectedly slowed to the 2.8% YoY rate in April, from 3.3% in the previous month. Apart from this, the UK political chaos and growing calls for Prime Minister Keir Starmer to step down warrant some caution before positioning for any further appreciating move for the GBP/USD pair in the absence of any relevant market-moving macro data, either from the UK or the US.

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.

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