Pound Sterling surges against US Dollar as Greenback suffers from Israel-Iran ceasefire
- The Pound Sterling soars to near 1.3600 against the US Dollar as a ceasefire between Israel and Iran has reduced safe-haven demand.
- Better-than-expected UK flash PMI data for June has supported the Pound Sterling.
- Several Fed Governors vow for an interest rate cut in July to support the US labor market.
The Pound Sterling (GBP) extends its Monday’s upside move to near 1.3600 against the US Dollar (USD) during European trading hours on Tuesday. The GBP/USD pair strengthens as a global risk rally driven by the ceasefire between Israel and Iran has dampened demand for safe-haven assets such as the US Dollar.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls sharply to near 98.13 on Tuesday from a fresh two-week high of around 99.40 posted the previous day.
During late Asian trading hours, Iranian state media confirmed a truce with Israel, stating that “a ceasefire came into effect between Iran and Israel following four waves of Iranian attacks on Israeli-occupied territories”, Reuters reported.
On late Monday, United States (US) President Donald Trump confirmed in a post on Truth.Social that both Israel and Iran have agreed to a “Complete and Total CEASEFIRE”.
Signs of easing Middle East tensions has sent Oil prices down almost 15% from its recent highs, in a big relief for Oil-importing nations.
Daily digest market movers: Pound Sterling trades higher ahead of BoE speeches
- The Pound Sterling outperforms its major peers on Tuesday, except for Asia-Pacific currencies, receiving support from upbeat preliminary United Kingdom (UK) S&P Global Purchasing Managers’ Index (PMI) data for June released on Monday and the Bank of England’s (BoE) “gradual and calibrated” monetary easing guidance.
- The PMI report showed that overall business activity grew at a faster-than-projected pace. The service sector activity rose steadily, while factory activity declined but at a slower-than-expected pace. The report also showed that new business volumes returned to growth after contracting for six straight months. However, firms cut jobs due to rising staffing costs after the increase in employers’ contribution to social security schemes.
- Last week, the BoE kept interest rates steady at 4.25%, as expected, and kept its gradual monetary expansion guidance. The UK central bank also warned of higher energy prices and downside risks to labor market.
- For fresh cues on the monetary policy outlook, investors BoE Governor Andrew Bailey's testimony before the Lords Economic Affairs Committee and speeches from Monetary Policy Committee (MPC) member Megan Greene and Deputy Governor Dave Ramsden during the day.
- In the US region, flash private sector PMI data for June came in stronger than projected. The Services PMI, which gauges activities in the services sector , came in higher at 53.1, compared to estimates of 52.9. The Manufacturing PMI steadied at 52.0, faster than expectations of 51.0. According to the PMI report, the sentiment of factory owners has increased on hopes of greater benefits from new trade policies imposed by US President Trump.
- On the monetary front, a sudden change in Federal Reserve (Fed) officials’ stance on the monetary policy outlook has weighed on bond yields and the US Dollar. On Tuesday, Fed Governor Michelle Bowman joined Governor Christopher Waller and argued in favor of reducing interest rates as soon as in July.
- “[I am] open to cutting rates as soon as the July FOMC meeting if inflation pressures stay contained,” Bowman said and warned of “signs of softness emerging in the labor market”. On Friday, Christopher Waller said that the Fed “should not wait for the job market to crash in order to cut rates."
Technical Analysis: Pound Sterling returns above 20-day EMA
The Pound Sterling advances to near 1.3600 against the US Dollar on Tuesday and aims to reclaim the three-year high of 1.3630 posted on June 13. The near-term trend of the GBP/USD pair turns bullish as it returns above the 20-day Exponential Moving Average (EMA), which is around 1.3500.
The 14-day Relative Strength Index (RSI) rebounds to near 60.00. A fresh bullish momentum would emerge if the RSI breaks above that level.
Looking down, the May 16 low around 1.3250 will act as key support zone. On the upside, the 13 January 2022 high around 1.3750 will act as a 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.