British Pound gains ground above 1.3450 on US

British Pound gains ground above 1.3450 on US–Iran progress

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The GBP/USD pair gains traction to near 1.3480 during the early Asian session on Monday. The US Dollar (USD) weakens against the British Pound (GBP) as the United States (US) and Iran signal peace progress. Trading volumes are expected to be light due to a market closure for Memorial Day in the US.

GBP/USD drifts higher to around 1.3480 in Monday’s early Asian session.
The prospect of a deal to end the Iran war buoyed risk appetite, supporting the British Pound.
UK Retail Sales ‌fell by the most in nearly a year in April.

Senior US officials said on Sunday that Washington and Tehran are closing in on a deal that would reopen the Strait of Hormuz, even as US President Donald Trump said he won’t “rush” into an agreement, per Bloomberg. Signs of progress in the US-Iran peace deal could provide some support to the riskier asset, such as the GBP against the USD in the near term.

Nonetheless, the threat of renewed war with Iran “still looms large” as Trump still leaves open the opportunity to launch military strikes. The US President stated that the US blockade in the Strait of Hormuz “will remain in full force and effect until an agreement is reached, certified, and signed.”

Softer UK Retail Sales data, along with an unexpected rise in the Unemployment Rate to 5.0%, has prompted traders to scale back expectations for future Bank of England (BoE) rate hikes by December. This, in turn, might cap the upside for the Cable. BoE policymaker Alan Taylor said that an "extended hold" is likely sufficient, adding that second-round inflationary impacts are less severe than those seen during the 2022 Russia-Ukraine invasion due to a cooling domestic jobs market.

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.