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The Pound Sterling declines notably against major currencies as Israel's strike on Iran sparks a flight from riskier assets.
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The Federal Reserve and Bank of England are both anticipated to keep interest rates unchanged in next week’s policy meetings.
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Weak UK economic data has led investors to speculate that the BoE may revise its “gradual and cautious” approach to monetary easing.
The Pound Sterling (GBP) underperforms against most major currencies on Friday—excluding antipodean counterparts—as risk sentiment deteriorates amid escalating Middle East tensions. Israel has declared war on Iran, launching strikes on multiple targets in northeastern Tehran, including military bases and nuclear sites. Prime Minister Benjamin Netanyahu described the campaign, dubbed “Operation Rising Lion,” as a strategic move to prevent Iran from acquiring nuclear weapons and to neutralize a direct threat to Israel’s survival.
Supporting Israel’s stance, US President Donald Trump stated that Iran “cannot have a nuclear bomb,” signaling partial endorsement of the offensive.
The geopolitical escalation has driven investors toward safe-haven assets, boosting demand for the US Dollar. The US Dollar Index (DXY) climbed 0.45% to near 98.30, rebounding from a three-year low of 97.60 touched on Thursday.
Looking ahead, the GBP/USD pair’s next major catalysts will be the upcoming monetary policy decisions from the Federal Reserve and the Bank of England. Both institutions are widely expected to leave interest rates unchanged.
Daily Digest Market Movers: Pound Sterling Slides Against US Dollar
- The Pound Sterling (GBP) dropped sharply to around 1.3530 against the US Dollar (USD) during Friday’s European session as geopolitical tensions in the Middle East spurred risk aversion among investors. The GBP/USD pair came under heavy selling pressure amid rising concerns after Israel’s military strikes on Iran intensified fears of broader regional conflict.
- Earlier in the day, the United States clarified that it had no involvement in the conflict and expressed a desire to de-escalate the situation through dialogue. However, Iran rejected Washington’s offer for negotiations. Senior Iranian lawmaker Alaeddin Boroujerdi confirmed that the sixth round of US-Iran talks had been cancelled following the Israeli offensive, according to Iran International.
- Looking ahead, market focus shifts to the Federal Reserve’s policy meeting next Wednesday. The Fed is widely expected to keep its benchmark interest rates unchanged in the 4.25%-4.50% range. Policymakers have signaled a wait-and-see approach as they evaluate the impact of President Trump’s newly announced economic policies on inflation and growth. According to the CME FedWatch Tool, traders anticipate a total of two 25-basis-point rate cuts by year-end, with the first expected as early as September.
- In the UK, the Bank of England (BoE) is also expected to maintain its key interest rate at 4.25% when it meets on Thursday. However, the central bank may need to reevaluate its “gradual and cautious” approach to monetary easing in light of recent weak economic data. The UK labor market showed signs of strain, with the unemployment rate rising to 4.6% for the three months ending in April—the highest since July 2021—and job creation slowing. This softening comes after the increase in employers' National Insurance contributions from 13.8% to 15% in April.
- Adding to the economic concerns, the UK economy contracted by a larger-than-expected 0.3% in April, and manufacturing output also declined sharply. Investors are now awaiting the UK’s May Consumer Price Index (CPI) data, due on Wednesday, for further insight into inflation trends ahead of the BoE’s rate decision.
Technical Analysis: GBP/USD Shows Signs of Weakening After Rejection at Multi-Year High
The Pound Sterling fell sharply after testing resistance near a three-year high around 1.3630, pulling back toward 1.3530. Despite the decline, the short-term trend for GBP/USD remains upward, supported by the 20-day Exponential Moving Average (EMA) currently trending higher near 1.3490.
The 14-day Relative Strength Index (RSI) has slipped below the 60 level and is pointing lower, indicating a potential pause in bullish momentum. A recovery above 60 could, however, reignite upward momentum in the near term.
On the upside, the January 13, 2022, high at 1.3750 serves as a key resistance level. To the downside, support is seen around 1.3434, a level marked by the September 26 high, which may act as a cushion against deeper pullbacks.
