British Pound rebounds as US Dollar weakens on Iran deal hopes

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GBP/USD holds minor gains on Friday after rebounding from intraday lows, supported by improving risk sentiment surrounding a potential US-Iran peace deal. At the time of writing, the pair trades around 1.3460 and is on course to end the week little changed.

GBP/USD rebounds from intraday lows as improving US-Iran sentiment pressures the US Dollar.
Trump says naval blockade on Iranian ports would be lifted as markets assess proposed US-Iran deal.
BoE and Fed officials strike cautious tone on inflation and interest rates.

A senior Iranian source told Reuters that "a political understanding has been reached between Iran and the US, but it has not yet been finalized." This comes after reports that both sides reached a proposed 60-day memorandum of understanding (MOU) that would extend the current ceasefire and reopen the Strait of Hormuz.

Meanwhile, US President Donald Trump said in a post on Truth Social that the naval blockade on Iranian ports would be lifted. Trump also said Iran “must agree that they will never have a Nuclear Weapon or Bomb” and added that the Strait of Hormuz “must be immediately open, no tolls, for unrestricted shipping traffic, in both directions.”

The cautious optimism pushed the US Dollar (USD) lower, helping the British Pound (GBP) recover part of the losses recorded earlier this week. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around the 98.80 mark after hitting a seven-week high of 99.54 on Thursday.

Oil prices also eased following the latest developments. West Texas Intermediate (WTI) is trading around $86 per barrel at the time of writing and heading for its first monthly decline in five months. However, crude prices still trade well above pre-war levels, keeping inflation risks alive.

Bank of England (BoE) Governor Andrew Bailey said earlier on Friday that “softness in the economy and uncertainty around the Iran war shock means tolerating temporarily above-target inflation is an appropriate way to approach the policy trade-off.” He added that the central bank has already “tightened policy considerably” after taking expected rate cuts off the table in response to the shock relative to what had been expected by markets.

Kansas City Federal Reserve (Fed) President Jeff Schmid said that policymakers “may need to weigh how to make monetary policy more restrictive” and stressed that the Fed “must signal commitment to lowering inflation.”

Looking ahead, traders next week will focus on the global flash PMI data and the US Employment Situation Report, which includes Nonfarm Payrolls (NFP), the Unemployment Rate and wage growth figures.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.