Pound Edges Higher Against Dollar as Greenback Rally Stalls

Key Moments

GBP/USD Rebounds but Faces Firm Dollar Headwinds

The GBP/USD pair recovered modestly after touching a three-week low during Asian trading on Monday, with the exchange rate climbing back toward the mid-1.3300s in recent dealings. Despite this bounce, the broader, resilient bullish tone surrounding the US Dollar suggests investors should remain cautious about positioning for a sustained advance in the pair.

US Jobs Data Fuels Dollar Strength

The US Dollar Index (DXY), which measures the performance of the Greenback against a basket of major currencies, jumped to a two-week high on Friday following a stronger-than-expected US Nonfarm Payrolls report. The employment release reinforced expectations that the US Federal Reserve will maintain a hawkish policy stance.

The report showed that the US economy generated 172K jobs in May, exceeding the 85K consensus forecast and surpassing the prior month’s upwardly revised figure of 179K. The Unemployment Rate remained at 4.3%, matching expectations. This steady jobless rate helped offset the anticipated moderation in wage growth, with Average Hourly Earnings easing to a 3.4% year-over-year pace from 3.6% in April.

Rate Expectations and Geopolitics Support the Greenback

Concerns that the war-related surge in energy prices could stoke inflation are also bolstering expectations for tighter US monetary policy. Based on the CME Group’s FedWatch Tool, market participants are currently assigning more than a 70% probability that the Federal Reserve will raise interest rates by at least 25 basis points in 2026. This outlook, combined with ongoing geopolitical risks, is likely to remain a supportive factor for the safe-haven US Dollar.

At the same time, political uncertainty in the United Kingdom – centered on a challenge to Prime Minister Keir Starmer’s leadership – poses an additional risk for the British Pound. This backdrop may help cap the upside in GBP/USD, even as the pair attempts to recover from recent lows.

Middle East Tensions Keep Risk Premium Elevated

Market participants may also prefer to remain on the sidelines as they monitor developments in the Middle East. US President Trump contacted Israeli Prime Minister Benjamin Netanyahu to urge Israel not to launch an attack on Iran following three waves of ballistic missiles targeting Israel’s Ramat David air base on Sunday night. Trump additionally told Axios that they are very close to a final deal with Iran and that he does not want it to blow up because of what’s happening now.

However, the United States and Iran still differ on a number of significant issues, including Tehran’s nuclear activities and the status of the Strait of Hormuz. These unresolved tensions keep geopolitical risk elevated and continue to underpin demand for the US Dollar.

Understanding the Pound Sterling

The latter part of the article provides background on the Pound Sterling (GBP) and the key factors that drive its value in global foreign exchange markets.

Pound Sterling Overview

The Pound Sterling (GBP) is described as the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is characterized as the fourth most traded currency in the global foreign exchange market, accounting for 12% of all FX transactions and averaging $630 billion in daily turnover, based on 2022 data.

Key GBP currency pairs highlighted include GBP/USD, commonly referred to as “Cable,” which represents 11% of FX trading; GBP/JPY, known among traders as the “Dragon,” with a 3% share; and EUR/GBP, accounting for 2%. The Bank of England (BoE) is responsible for issuing the Pound Sterling.

Bank of England Policy and Its Impact on GBP

The Bank of England’s monetary policy decisions are identified as the dominant influence on the Pound’s valuation. The BoE’s primary objective is to maintain “price stability,” which is defined as an inflation rate near 2%. The main policy instrument used to achieve this goal is the adjustment of interest rates.

When inflation runs above target, the BoE seeks to cool price pressures by increasing interest rates, raising borrowing costs for households and businesses. Such rate hikes are typically positive for the Pound, as higher yields can attract foreign capital. Conversely, when inflation is too low and signals slowing growth, the BoE may reduce interest rates to make credit cheaper, encouraging borrowing and investment. In that scenario, the Pound often comes under downward pressure.

Role of Economic Data in Shaping Sterling Moves

Macro-economic releases are another important driver of the Pound’s performance. Data such as Gross Domestic Product (GDP), Manufacturing and Services Purchasing Managers’ Index (PMI) readings, and labor market statistics can materially influence GBP.

A robust economic backdrop tends to support the currency by drawing in more foreign investment and potentially prompting the BoE to consider higher interest rates, which would directly bolster Sterling. Conversely, weak figures typically weigh on the Pound.

Trade Balance Effects on the Pound

The article also points to the Trade Balance as a key indicator for Sterling. This measure captures the difference between a country’s export revenues and import expenditures over a specific period.

A positive Trade Balance – where export income exceeds import spending – can strengthen a currency because international buyers need to purchase that currency to pay for the exported goods. By contrast, a negative Trade Balance tends to have the opposite effect, exerting downward pressure on the currency.