British Pound slips as hawkish Fed outlook boosts US Dollar
- GBP/USD depreciates as the Fed signals further rate increases to combat persistent inflation.
- Markets currently price in a 56.5% probability of another rate hike at the upcoming October meeting.
- Scotiabank notes the UK's constructive political backdrop and fiscal responsibility continue to support the Pound.
GBP/USD inches lower after registering modest gains in the previous trading day, hovering around 1.3390 during Asian hours on Monday. The pair loses ground as the US Dollar (USD) holds ground amid hawkish sentiment surrounding the Federal Reserve (Fed) policy outlook. Last week, the US Federal Reserve delivered a 25-basis-point rate hike, its first hike in three years, as officials sought to curb inflation and flagged more hikes in the coming months.
Fed Chair Kevin Warsh said that "the plain fact is that inflation is too high and has been for too long." "This summer's inflation readings do not tell me that underlying trends have meaningfully improved," he added. Markets are now pricing in nearly a 56.5% chance of another US rate hike when the Fed meets next in October, compared with nearly 42.5% a week ago, according to the CME FedWatch tool.
UK political backdrop stays supportive as markets trust fiscal stance
Strategists at Scotiabank note that the political backdrop in the UK remains a tailwind for the Pound, with “the narrative remains constructive as market participants and media signal ongoing confidence in the government’s efforts to maintain their commitment to fiscal responsibility.” This continued faith in the authorities’ fiscal stance is seen as an important underpinning for sentiment, even as markets weigh the implications of recent BoE decisions and incoming data.
BoE flags stronger inflation risks but sticks to gradual tightening path
The FXS Speechtracker score of 7.2 versus a historic 6.6 points to a more hawkish-than-usual tone, driven by the BoE’s explicit warning that inflation risks are now tilted to the upside and that CPI is expected to exceed 4% in early 2027 versus a 3.2% peak previously. This hawkish tilt is reinforced by the 3-vote dissent for an immediate hike to 4% and guidance that policy may have to tighten further if the Mideast conflict persists and second-round effects rise, even as the majority opted to hold at 3.75% and still sees little evidence of material second-round inflation effects so far.
On balance, the message is one of conditional tightening bias rather than an imminent hiking cycle, with stronger Q3 GDP at 0.4% and a modestly slower but still sizeable QT unwind at £46 billion a year shaping a steady, not aggressive, withdrawal of accommodation. The decision to pause APF gilt auctions until April 2027 and to hold a large stock of long-dated gilts to maturity signals a desire to manage balance-sheet risks carefully, which tempers the hawkish inflation rhetoric and suggests a measured path for the Pound rather than a sharp repricing of UK rate expectations.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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