GBP/USD pauses after Middle East crisis inspires demand for USD haven

• GBP/USD is flat after Tuesday’s decline, caused by an increase in safe-haven demand for the US dollar
• Iran fueled Middle East tensions with a massive missile attack on Tel Aviv.
• Divergent monetary policy outlooks could pare GBP/USD’s losses.

GBP/USD is stuck and swinging between warm gains and losses in the 1.3280s on Wednesday, after falling a full cent the previous day as the US dollar (USD) strengthened on increased refuge flows from an escalation . of the conflict in the Middle East.

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

The night sky was lit up on Tuesday night after Iran fired about 200 missiles, many of them ballistic, at the Israeli capital Tel Aviv in retaliation for the killing of 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 rising, the dollar is likely to see continued support from safety-seeking investors. This in turn is likely to cap any gains for GBP/USD.

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

The BoE has advocated a cautious, “steady” approach to cutting interest rates amid still high service sector inflation and relatively robust growth. In the US, by contrast, fears of a tight and weak labor market briefly sent market-based bets rising to 60% that the Fed will follow up with another 50bps cut at the meeting from November.

While those bets have since softened after US data reassured investors about the state of the economy, investors remain on edge as they await key labor market data in the form of US NonFarm Payrolls data for September, published on Friday.