Pound Sterling holds onto gains against US Dollar driven by Israel-Iran truce
- The Pound Sterling shows strength near 1.3650 against the US Dollar after the announcement of the Israel-Iran ceasefire.
- Fed’s Powell states that the central bank still needs time to assess the impact of tariffs on inflation.
- BoE’s Bailey expresses concerns over easing labor market strength.
The Pound Sterling (GBP) trades firmly near a fresh three-year high around 1.3650 against the US Dollar (USD) during European trading hours on Wednesday. The GBP/USD pair strengthens as the US Dollar continues to underperform its peers, as its safe-haven demand has diminished significantly after the announcement of a ceasefire between Israel and Iran on Tuesday.
During the European trading session, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, struggles to hold the weekly low around 98.00.
On Tuesday, United States (US) President Donald Trump announced that a truce between Israel and Iran has become effective and urged them not to violate it. “The ceasefire is now in effect. Please do not violate it!" Trump wrote in a post on Truth Social.
Meanwhile, the support for maintaining interest rates at their current levels by Federal Reserve (Fed) Chair Jerome Powell in his semi-annual testimony before the US House Financial Services Committee on Tuesday has failed to uplift the US Dollar.
“I don’t think we need to be in any rush as long as economy is strong, and the uncertainty is high surrounding the still-unresolved tariff debate,” Powell said, Reuters reported. He guided that the central bank will closely monitor the “impact of tariffs on inflation during June and July” and expressed confidence that “interest rate cuts would come sooner if the central bank sees the tariff-driven inflation not as strong as expected."
Daily digest market movers: Pound Sterling stabilizes while BoE’s Bailey warns of potential labor market risks
- The Pound Sterling seems broadly stable against its major peers on Wednesday, even as Bank of England (BoE) Governor Andrew Bailey warned of downside risks to the United Kingdom’s (UK) labor market and reiterated a gradual downward interest rate path in his testimony before the Lords Economic Affairs Committee on Tuesday.
- “We [BoE] are starting to see labour market softening, and wage settlements are likely to come off," Bailey said. He added that the increase in employers’ contribution to social security schemes seems to be “affecting labour market”.
- Last week, Andrew Bailey also stated in the monetary policy announcement that the central bank will closely monitor upside inflation risks and downside labor market risks after leaving interest rates unchanged at 4.25%, with a 6-3 majority vote.
- Meanwhile, data from the latest employment surveys has also shown a slowdown in job vacancies. The recruitment platform Indeed showed that job vacancies were down 5% in mid-June compared to their level at the end of March, Reuters reported.
- This week, the GBP/USD pair will be influenced by the US Personal Consumption Expenditures Price Index (PCE) data for May, which will be released on Friday. The Fed’s preferred inflation gauge is expected to show that price pressures grew at a fast pace year-over-year. The core PCE inflation data – which excludes volatile food and energy prices – is estimated to have accelerated to 2.6% YoY from 2.5% in April.
Technical Analysis: Pound Sterling stays above 20-day EMA
The Pound Sterling clings to gains near a fresh three-year high around 1.3650 against the US Dollar on Wednesday. The near-term trend of the GBP/USD pair remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 1.3513.
The 14-day Relative Strength Index (RSI) rebounds above 60.00. A fresh bullish momentum would emerge if the RSI holds above that level.
Looking down, Monday's low at 1.3370 will act as a key support zone. On the upside, the January 13, 2022, high near 1.3750 will act as the key barrier.
Pound Sterling FAQs
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).
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.
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.
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.