The GBP/USD is rising as the US Dollar weakens because of reduced demand for safe-haven assets following a ceasefire between Israel and Iran. Comments from Fed Chair Powell indicate that rate cuts may be delayed until the fourth quarter. Meanwhile, the British Pound (GBP) could face challenges due to the Bank of England’s (BoE) dovish policies. The GBP/USD pair has increased for three sessions in a row, trading near 1.3620 during the Asian trading hours on Wednesday. It is close to a peak of 1.3648, the highest level since February 2022. Improved risk sentiment after tensions in the Middle East eased is boosting the GBP/USD.

Ceasefire’s Impact on Forex Markets

US President Trump announced a ceasefire between Iran and Israel, creating hope for an end to their 12-day conflict. However, uncertainties about the ceasefire’s durability remain, especially regarding potential nuclear talks and the status of Iran’s enriched uranium. In his testimony, Fed Chair Powell suggested that rate cuts should be delayed until later this year. Kansas City Fed President Schmid advocates for waiting to see the economic effects of tariffs. The dovish comments from BoE officials could affect the GBP, as BoE Governor Bailey has expressed concerns over the reliability of labor data. The Pound Sterling is the UK’s official currency and plays a vital role in global foreign exchange trading. The BoE’s monetary policy, especially through interest rate changes, significantly influences its value, particularly in managing inflation. Economic indicators like GDP, PMI, and trade balances also affect the strength of Sterling. The GBP/USD pair has sustained its upward movement and is nearing levels not seen since early 2022. This rally coincides with improved global risk appetite, shifting flows away from safe-haven currencies like the US dollar. The fragile ceasefire in the Middle East serves as temporary relief for global markets, giving the Sterling more space to rise.

Monetary Policies and Market Reactions

While US officials claim that military tensions have eased, there is still low confidence in the ceasefire’s stability. As we watch for the potential restart of nuclear negotiations and their implications, any setback could reverse the current favorable mood and bring demand back to the dollar. Until then, lighter trading volumes are likely to favor risk-oriented currency pairs. On the monetary policy front, Powell’s comments emphasized patience. He noted that inflation remains stubborn and the US job market has been stronger for longer than expected. His remarks suggest that interest rate cuts are unlikely in the near term, pushing expectations for the first cut potentially toward late 2024. Schmid supported this view by noting that new tariffs could change growth and inflation dynamics in ways that will take time to reflect in the data. This indicates a reluctance to make premature cuts to monetary policy. In contrast, the Bank of England has a different outlook. Bailey’s concerns about the inconsistencies in labor market data raise worries about ongoing wage pressures. Without clear employment trends, policymakers may feel limited. If revisions show weaker job growth, it could point toward earlier rate cuts in the UK. Recent communications from BoE officials have leaned toward caution, reflecting discomfort with maintaining tight policies amid uncertainties about economic slack. In the coming weeks, we will closely monitor the UK’s GDP figures and upcoming PMI surveys. Any signs of weakness may reinforce dovish expectations and limit the Pound’s gains, even if the dollar remains weak. In the US, inflation data and employment reports will be scrutinized for signs of slowing, which could lead markets to adjust their timelines for Fed easing. Markets are currently testing assumptions around central bank reactions daily. We expect increased sensitivity to speeches and unexpected data. The widening gap between Fed and BoE rate trajectories could lead to more volatility, especially if geopolitical risks resurface. For instance, Victoria at the BoE earlier stressed the importance of looking past one-off price shocks, showing their tendency to under-react. This stance contrasts with US officials, who are currently less flexible. From a trading perspective, market positioning appears skewed toward expectations of slower US rate cuts, but this could change rapidly. For now, the Pound remains strong, but this depends on ongoing optimism that attracts capital to risk trades. With market pricing potentially shifting quickly due to unexpected data, we should be prepared for changes. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now