Iran talks lift pound to highest level since mid-September

200-day average cleared as GBP/USD pushes past its October highs.
ING attributes Sterling's advance largely to the Dollar's decline alongside Crude Oil, rather than UK developments.
4% Bank Rate expected on Thursday, with the BoE forecast to back a rise by 7-2.

GBP/USD reached just below 1.3450. Hopes of a US-Iran agreement drove Crude Oil and the Dollar lower, lifting the pair to its strongest level since mid-September. It subsequently surrendered about two-thirds of its advance from the session low and has since remained in the bottom half of the day's trading range.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Traders unwound Friday's bets on a weekend attack after reports that President Trump wanted to give diplomacy with Iran time to proceed, sending Crude Oil lower. An official briefed on the negotiations said Qatari mediators were travelling to Tehran to discuss a draft US-Iran agreement. ING attributed the Pound's appreciation primarily to the Dollar's accompanying decline, rather than developments in the UK.

After Sterling reached its high, Crude Oil's decline more than doubled as President Trump said an agreement with Iran was possible. GBP/USD has since held within 1.3400 to 1.3450. A 55.5 reading for the Institute for Supply Management (ISM) manufacturing index, above the 54.6 forecast, also left the pair unmoved.

4% Bank Rate forecast leads the calendar

A 7-2 vote to lift the UK's Bank Rate from 3.75% to 4% is expected when the Bank of England (BoE) delivers its decision on Thursday at 12:00 GMT. The previous decision to hold was backed by 6-3. With a rate increase fully priced in, the vote split and BoE Governor Bailey's comments at 12:30 GMT remain the elements not yet reflected in market pricing.

Tuesday brings the US midterm elections, followed by October Nonfarm Payrolls (NFP) on Friday at 13:30 GMT. Payroll growth is forecast at 65K, compared with the previous 29K. Before that, Cleveland Fed President Hammack speaks on Thursday at 13:50 GMT. She was one of two Fed voters to support a rate increase on October 28. Her comments and the employment figures will bear on whether the Fed raises rates after that decision to hold.

1.3400: GBP/USD above the 200-day EMA

About half of GBP/USD's decline from its late-August peak below 1.3700 to the October 14 trough just below 1.3150 has now been recovered. The pair trades above both the 50-day Exponential Moving Average (EMA), near 1.3350, and the 200-day EMA, near 1.3400. The latter area capped progress around October 22. Having been overbought since around October 20, daily momentum is now beginning to ease.

5-minute chart: GBP/USD

Daily chart: GBP/USD

Pound Sterling: key questions

Pound Sterling: what are its main features?

12% of global foreign exchange (FX) transactions involve the Pound Sterling (GBP). According to 2022 figures, turnover averages $630 billion a day, making it the world's fourth most traded currency. Dating back to 886 AD, Sterling is the world's oldest currency and the United Kingdom's official currency. Among its main trading pairs, GBP/USD, known as ‘Cable’, represents 11% of FX transactions. GBP/JPY, called the ‘Dragon’ by traders, accounts for 3%, while EUR/GBP represents 2%. Responsibility for issuing the Pound Sterling rests with the Bank of England (BoE).

Bank of England policy: what drives Sterling's response?

Around 2% inflation is the Bank of England's target for “price stability”. Its assessment of progress towards that primary objective guides monetary policy, the most important influence on the Pound Sterling's value. Interest-rate adjustments are its principal policy tool. To curb excessive inflation, the BoE seeks to raise borrowing costs for households and businesses through higher interest rates. GBP generally benefits because the higher returns make the UK a more appealing destination for international investors' funds. Conversely, inflation that is too low signals slowing economic growth. The BoE will then consider cutting interest rates to reduce credit costs, encouraging businesses to borrow more and invest in projects that generate growth.

Economic indicators: why do they move the Pound?

Sterling can respond to economic releases because they provide a measure of the economy's health. GDP, Manufacturing and Services PMIs, and employment figures can all shape GBP's direction. Economic strength supports the Pound by drawing in more overseas investment. It may also prompt the BoE to raise interest rates, directly strengthening GBP. Weak economic readings, by contrast, are likely to weigh on Sterling.

Trade Balance: why does it matter for Sterling?

Export receipts minus import spending over a specified period make up a country's Trade Balance, another important release for the Pound Sterling. Strong overseas demand for a country's exports supports its currency through the additional buying demand generated by foreign customers purchasing those goods. A positive net Trade Balance therefore strengthens the currency, while a negative balance has the opposite effect.