- GBP/USD is facing difficulties due to rising risk aversion sentiment as the Middle East conflict intensifies.
- Iran fired more than 200 ballistic missiles at Israel and warned that any counterattack would lead to “massive destruction.”
- Bank of England Governor Green suggested further interest rate cuts were likely as prices were “moving in the right direction”.
GBP/USD remains weak following the losses recorded in the previous session, trading around 1.3280 in Asian time on Wednesday. This downside could be due to risk aversion due to rising geopolitical tensions in the Middle East, weakening the risk-sensitive GBP and GBP/USD pair.
Iran fired more than 200 ballistic missiles toward Israel on Tuesday, shortly after the United States warned that an attack was imminent. According to Bloomberg, the Israeli Defense Forces reported that several missiles were intercepted, while there were also reports that one person was killed in the West Bank.
Israeli Prime Minister Benjamin Netanyahu vowed to retaliate against Iran following Tuesday's missile attack. In response, the Iranian government warned that any counterattack would lead to “massive destruction,” raising concerns about the possibility of a wider conflict.
The US dollar (USD) receives support from Federal Reserve Chairman Jerome Powell's latest speech. Powell said the central bank would gradually lower interest rates over time. Fed Chairman Jerome Powell added that the recent half-point rate cut should not be seen as a sign of similarly aggressive future action, noting that future rate changes are likely to be more modest.
On Tuesday, Bank of England (BoE) policymaker Megan Green warned that the United Kingdom's (UK) consumption-led recovery could trigger a new wave of inflation. But Green said further rate cuts were likely because prices were “moving in the right direction,” according to Bloomberg.
Green, a member of the Bank of England's policy committee, also said he believed the neutral interest rate had risen since the inflation shock. Most estimates put the Bank of England's neutral interest rate at around 3.5%, but Green did not provide a specific figure. Neutral interest rate refers to the level at which central bank policy neither promotes nor restrains economic growth.
Traders are expected to pay close attention to the upcoming US ADP employment change report and comments from Federal Reserve officials on Wednesday for further guidance. In the UK docks, Thursday's Bank of England Monetary Policy Report hearing will be closely watched.
Frequently asked questions about the British pound
Pound Sterling (GBP) is the world's oldest currency (886 AD) and the official currency of the United Kingdom. According to 2022 data, foreign exchange (FX) trade volume is the fourth largest in the world, accounting for 12% of all trades and an average of $630 billion per day. Its main trading pairs are GBP/USD, also known as the “cable”, which accounts for 11% of FX, GBP/JPY (3%), known as the “dragon” among traders, and EUR/GBP (2%) . %). Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the British pound is monetary policy, as determined by the Bank of England. The Bank of England's decision will be based on whether it has achieved its main objective of “price stability,'' or a stable inflation rate of around 2%. The main tool for achieving this is interest rate adjustment. When inflation is too high, the BoE tries to control it by raising interest rates, making credit more costly for people and businesses. This is generally positive for the pound, as rising 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 that economic growth is slowing. In this scenario, the BOE would consider lowering interest rates to make credit cheaper so companies can borrow more to invest in growth-generating projects.
The data release measures the health of the economy and could impact the value of the pound. Indicators such as GDP, manufacturing and services PMI, and employment can all influence the direction of GBP. A strong economy is good for the pound. As well as attracting more overseas investment, that could prompt the BoE to raise interest rates, which could directly lead to stronger sterling. Otherwise, if economic indicators are weak, the pound may weaken.
Another important piece of data about the British pound is its trade balance. This indicator measures the difference between what a country earns from exports and what it spends on imports over a given period of time. If a country produces highly sought-after export goods, its currency will benefit purely from the additional demand generated from foreign buyers looking to purchase these goods. Therefore, if the net trade balance is positive, the currency strengthens, and vice versa if it is negative.
