British Pound declines to near 1.3500 as US-Iran tensions rise
- GBP/USD weakens to around 1.3500 in Wednesday’s early European session.
- The US launched strikes against targets in Iran, raising fears of wider war.
- BoE's Bailey sees 'subdued' second-round inflation effects for now.
The GBP/USD pair declines to near 1.3500 during the early European trading hours on Wednesday. Ongoing tensions in the Middle East provide some support to a safe-haven currency such as the US Dollar (USD) against the British Pound (GBP). All eyes will be on the US August jobs report later on Friday.
CNBC reported that the US and Iran traded a new round of attacks Tuesday, with American forces striking Iranian targets around the critical waterway and Tehran saying it had launched a retaliatory operation targeting US interests across the region.
US President Donald Trump said the strikes were in retaliation for Iran trying to put mines in the critical waterway and for an earlier attack on a military base. He warned of more attacks to come if Tehran responded.
Bank of England (BoE) Governor Andrew Bailey downplayed the inflationtion threat, sayhat the United Kingdom (UK) is not yet experiencing significant second-round inflation effects. Markets are fully pricing in a 25 basis points (bps) hike this year and another by the spring, according to Bloomberg.
“We’re seeing quite subdued second-round effects, I think we’ve seen a softening labor market for some time now,” said Bailey. “I’ve taken the view that I think we can watch this situation for the moment,” he added.
GBP downside risks persist as UOB keeps focus on 1.3480
Strategists at UOB Group maintain a cautious stance on GBP, reiterating that while they had previously highlighted last Friday (28 Aug, spot at 1.3595) that GBP “could edge lower,” they initially expected “any decline could be contained within a 1.3550/1.3645 range.” However, after the Pound slipped to a low of 1.3527, they noted yesterday (31 Aug, spot at 1.3540) that “the risk remains on the downside, and the level to watch is 1.3480.” UOB adds that they “will continue to hold the same view as long as GBP holds below 1.3600,” keeping 1.3600 unchanged as the “strong resistance” level.
Technical Analysis: GBP/USD keeps a bullish vibe above the 100-day SMA
In the daily chart, GBP/USD holds a modest bullish bias as spot remains above the 100-day simple moving average (SMA) and the lower Bollinger Band, suggesting underlying demand on dips. However, price is still trading below the Bollinger mid-line, indicating that upside traction is not yet dominant, while the Relative Strength Index (RSI) at about 47 keeps momentum in a neutral-to-slightly consolidative stance.
On the topside, initial resistance emerges at the Bollinger middle band around 1.3550, where a daily close above would open the door toward the upper Bollinger Band near 1.3665. On the downside, immediate support is defined by the recent price area around 1.3500, with the 100-day SMA at 1.3443 and the lower Bollinger Band at 1.3435 forming a nearby demand cluster that, if broken, would undermine the current constructive bias.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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.