British Pound drifts higher to near 1.3350 ahead US CPI data

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The GBP/USD pair gains ground to around 1.3355 during the early European trading hours on Tuesday.

GBP/USD drifts higher to near 1.3355 in Tuesday’s early European session.
The US launched new strikes on Iran.
Traders await the US June CPI inflation report later on Tuesday for fresh impetus.

The GBP/USD pair gains ground to around 1.3355 during the early European trading hours on Tuesday. The British Pound (GBP) strengthens against the US Dollar (USD) as traders have ramped up bets that the Bank of England (BoE) will be forced to raise interest rates this year to keep inflation under control.

Renewed Middle East tensions have caused oil prices to spike again after falling back to pre-conflict levels over the last month. BoE Chief Economist Huw Pill signaled rates will likely rise this year to prevent inflation from becoming entrenched.

Futures markets are now focusing on September and November as the most likely meetings for the UK central bank to hike the borrowing rate, although the probability of a hike remains below 50%, according to Morningstar.

Meanwhile, US President Donald Trump earlier declared the US would ensure the Hormuz Strait is open and said it would charge a 20% fee. On Tuesday, the US carried out more attacks on Iran, with Iranian media reporting explosions on Kish and Qeshm islands, as well as Bushehr and Bandar Abbas. Iran's military said that it attacked US military sites in Kuwait, Bahrain, Jordan, and two oil supertankers in the Strait of Hormuz. Rising tensions in the Middle East could boost a safe-haven currency such as the Greenback and act as a headwind for the major pair.

Traders will keep an eye on the US June Consumer Price Index (CPI) inflation report later on Tuesday. Any signs of softer inflation in the US would delay the case for the US interest rate hikes and undermine the US Dollar (USD) against the Cable. Federal Reserve (Fed) Kevin Warsh's congressional testimony will be closely watched.

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.