Pound Sterling weakens as Middle East tensions escalate and UK PMI disappoints
- GBP/USD depreciates amid rising Middle East conflict.
- Gulf states are near direct involvement in the Iran conflict, with Saudi Arabia signaling a potential military shift.
- UK preliminary PMIs disappoint, with Composite output hitting a six-month low at 51.0.
The GBP/USD pair faces selling pressure on Tuesday after registering modest gains in the previous day, weighed down by a slight rebound in the US Dollar and softer-than-expected preliminary UK S&P Global Purchasing Managers Index (PMI) data. At the time of writing, the pair is trading near 1.3395 at the start of the American trading session.
The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 99.40, recovering part of the losses recorded on Monday.
The risk-sensitive pair also weakens amid rising risk aversion as US-aligned Gulf states move closer to direct involvement in the Iran conflict, with Saudi Arabia signaling a potential military shift, according to a Wall Street Journal report.
Israel launched its latest attack on Iran despite US President Donald Trump signaling a pause in strikes on energy infrastructure after what he described as productive talks with Tehran. However, Iran’s Foreign Minister Abbas Araghchi denied any engagement with Washington. Iranian Parliament Speaker Mohammad Bagher Ghalibaf also said on Monday that no negotiations had taken place with the US. Meanwhile, Iranian senior military adviser Mohsen Rezaei stated that the conflict would persist until Iran receives full compensation for the damage incurred.
Meanwhile, the latest UK S&P Global PMI data showed that business activity slowed in March as geopolitical tensions weighed on sentiment.
The Composite PMI fell to 51.0 from 53.7, missing expectations of 52.8 and marking a six-month low. The Services PMI dropped sharply to 51.2 from 53.9, well below the 53.0 forecast. The Manufacturing PMI edged down to 51.4 from 51.7, but slightly beat expectations of 51.1.
Attention now turns to the upcoming US preliminary PMI data due later on Tuesday, followed by the UK’s Consumer Price Index (CPI) and Producer Price Index (PPI) reports scheduled for Wednesday.
On the monetary policy front, the Bank of England (BoE) kept interest rates steady at 3.75% at its March meeting on Thursday, as widely expected. BoE Governor Andrew Bailey said the Middle East conflict will cause a "shock to the economy" and push up inflation in the near term, adding that restoring safe shipping through the Strait of Hormuz is key to addressing rising energy prices.
The Federal Reserve (Fed) also kept its benchmark interest rate unchanged in the 3.50%-3.75% range. Fed Chair Jerome Powell said in the post-meeting press conference that the central bank remains cautious as uncertainty surrounding the Middle East conflict and rising energy prices clouds the economic outlook. He noted that it is still too early to assess the full impact of higher oil prices on inflation and growth, adding that policymakers will continue to monitor incoming data before making any policy adjustments.
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.