GBP/USD pauses after sell-off on Middle East crisis inspired USD haven demand

• GBP/USD stalls after Tuesday’s drop which was caused by a surge in safe-haven demand for the US Dollar 
• Iran stoked Middle Eastern tensions with a mass missile strike on Tel Aviv. 
• Continued diverging outlook on monetary policy may put a floor under GBP/USD’s losses.

GBP/USD stalls and seesaws between tepid gains and losses in the 1.3280s on Wednesday after falling a whole cent on the previous day, when the US Dollar (USD) strengthened as a result of a rise in safe-haven flows due to an escalation of the conflict in the Middle East. 

Despite recent losses, the GBP/USD is in an overall uptrend, which has seen it gain almost 5.0% from the early August lows. 

Night skies were set alight on Tuesday evening after Iran fired around 200 missiles, many of which were ballistic at the Israeli capital Tel Aviv, in retaliation for the killing of the Hezbollah leader Hassan Nasrallah.The situation remains tense after Israeli Prime Minister Benjamin Netanyahu vowed Israel would avenge the attack, and that Iran had “made a big mistake”. 

The New York Times also reported that Israel is committing more troops to its bloody ground offensive in Lebanon, and with tensions running high, the Dollar is likely to see continued support from investors seeking safety. This, in turn, is likely to cap any gains for GBP/USD. 

The pair had been in a steady uptrend since early August because of the divergent outlook for monetary policy in the UK and the US. In the UK, the Bank of England (BoE) decided to leave interest rates unchanged at its policy meeting in September whilst in the US the Federal Reserve (Fed) slashed interest rates by a double-dose 50 bps at its meeting. Lower interest rates are generally negative for a currency – in this case the Dollar – as they reduce capital inflows.

The BoE has been advocating a cautious, “steady-as-she-goes” approach to reducing interest rates amid still-high services sector inflation and relatively robust growth. In the US, conversely  fears about a hard-landing and weak labor market briefly caused market-based bets to soar to 60% that the Fed would follow up with another 50 bps cut at their November meeting. 

Although these bets have since eased after US data reassured investors about the state of the economy, investors remain tense as they await a key piece of data regarding the labor market, in the form of US NonFarm Payrolls data for September, out on Friday.