Pound Sterling ticks down as Iran’s disagreement to ceasefire revives risk-off mood
- The Pound Sterling edges lower against its major peers amid risk-off sentiment.
- Iran’s rejection to Trump’s ceasefire proposal has revived Middle East fears.
- BoE’s Breeden said that the ongoing energy shock is very different from the last energy shock in 2022.
The Pound Sterling trades marginally lower against its major currency peers, edging down to near 1.3350 against the US Dollar (USD) during the European trading session on Thursday. The British currency is under pressure as Iran’s rejection to United States (US) President Donald Trump’s 15-point settlement plan and month-long ceasefire proposal has revived fears of a prolong Middle East war.
At the press time, S&P 500 futures are down 0.7% to near 6,545, reflecting the diminished risk appetite of investors. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near Wednesday’s high around 99.70.
On Wednesday, Tehran refused to accept Trump’s proposal relayed by Pakistan and even put forward its demands for ceasefire talks, which includes a new order in the Strait of Hormuz that would allow it to collect transit fees, as well as guarantees that the war would not restart and an end to Israeli strikes on Hezbollah, The Wall Street Journal (WSJ) reported, which were described as “ridiculous and unrealistic” by a US official.
Tehran’s demands before peace talks have prompted fears that conflicts in the Middle East are unlikely to ease in the near term, which will keep oil supply disrupted.
On the domestic front, United Kingdom (UK) households are expected to face the burden of high inflation amid rising energy prices due to disruption in energy shipments from the Strait of Hormuz.
During the European session, Bank of England (BoE) Deputy Governor Sarah Breeden also warned that the ongoing energy shock is very different to last energy shock in 2022, which will have repercussions on inflation and employment; however, we “will know more on balance of risks and scale and duration of shock by April meeting”.
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.