Payrolls, Middle East Tensions In Focus

The Pound US Dollar (GBP/USD) exchange rate wavered on Wednesday, amid reports of diplomatic efforts to end the war in the Middle East.

DAILY RECAP:

The US dollar (USD) initially faced modest headwinds on Wednesday amid an easing of safe-haven demand, following a report that operatives from Iran’s Ministry of Intelligence signalled openness to talks with the US Central Intelligence Agency (CIA) aimed at ending the ongoing conflict.

According to The New York Times, Iranian intelligence reached out indirectly to the CIA through a third country’s spy agency with a proposal to explore options to end the war.

Although US officials remain sceptical that either side is genuinely ready to pursue negotiations in the near term, the report helped lift market sentiment through the first half of Wednesday’s European session.

The subsequent release of US macroeconomic data then revived USD demand, following a larger-than-expected rise in employment last month, according to the latest ADP report, alongside a sharp rise in US services sector activity over the same period.

Trade in the Pound (GBP) was mixed on Wednesday as the potential economic fallout from the conflict in the Middle East continued to ripple through markets.

Particular attention has been placed on inflation risks after UK gas prices surged sharply since the start of the week.

The spike in energy costs is expected to feed through into consumer prices in the months ahead and has already led markets to scale back expectations that the Bank of England (BoE) could cut interest rates later this month.

While the prospect of tighter monetary policy is typically supportive for Sterling, GBP investors remain wary about the impact that higher borrowing costs and surging energy prices could have on economic growth.

Near-Term GBP/USD Forecast: Middle East and Payrolls in Focus

Turning to the second half of the week, the direction of the Pound to US Dollar (GBP/USD) exchange rate is likely to remain tied to developments in the Middle East.

If tensions continue to mount and the Strait of Hormuz remains effectively closed, energy price concerns may see investors continue to favour the US Dollar over the Pound.

However, USD investors may also remain cautious ahead of Friday’s non-farm payroll report, amid forecasts that February’s data will report a slowdown in the US labour market.

Meanwhile, Sterling sentiment is likely to remain sensitive to energy prices, leaving the Pound vulnerable to further losses if gas and oil costs continue to rise.