British Pound underperforms as traders reconsider BoE interest rate hike bets

• The British Pound drops against its major peers on easing hawkish BoE prospects.
• The BoE clarifies that interest rate hikes would be needed if second-round inflation effects start emerging.
• Investors doubt the Fed's rate hikes in the near term.

The British Pound (GBP) is down against its major currency peers, trading marginally lower at around 1.3444 against the US Dollar (USD) during the European trading session on Friday. The British currency faces selling pressure as financial markets reconsider Bank of England (BoE) interest rate expectations for the September policy meeting after the monetary policy announcement on Thursday.

Markets pare back BoE tightening bets as Deutsche Bank downplays hike risks

Analysts at Deutsche Bank stress that the BoE was not “edging towards a rate hike” at its latest meeting, despite the split vote on the MPC. They note that markets “dialed back expectations for BoE hikes in response,” with the implied probability of a September move dropping from 60% to 30%. In parallel, Deutsche Bank highlights that “31bps of hikes [were] priced by year-end (-11.4bps on the day),” underscoring how investors reassessed the near-term tightening path following the Bank’s communication.

Market experts view remarks from BoE Governor Andrew Bailey at the press conference as indicating that the bar for an interest rate hike in the near term is still high, even as he explicitly said, "If Mideast conflict persists and we get second-round effects, we will likely need to raise rates."

BoE tone tempers hike fears as war outcome shapes rate cut debate

According to analysts at Commerzbank, the Bank of England’s latest communication struck a deliberately cautious tone. They highlight that at the press conference, Governor Andrew Bailey stressed that no one should “leave this room thinking that the BoE is edging towards a hike,” underscoring the Bank’s reluctance to signal any imminent tightening. At the same time, Commerzbank notes that some policymakers acknowledged that “rate cuts could once again come into focus should the war come to an end,” suggesting that the policy debate remains finely balanced and contingent on developments in the Middle East.

Against the US Dollar, the British currency recovers a majority of its early losses as the latter falls back amid doubts about whether the Federal Reserve (Fed) would use interest rate hikes to tame elevated United States (US) inflationary pressures.

In European trade, the US Dollar Index (DXY), which gauges the Greenback's value against six major currencies, gives back a majority of its early gains and trades marginally higher to near 100.00.

Dollar under pressure as Fed ambiguity fuels post-FOMC selloff

Analysts at ING highlight that the “post-FOMC dollar selloff accelerated yesterday,” as markets remained uneasy about the policy outlook. They note that investors are increasingly concerned “that the Federal Reserve may be reluctant to translate its price stability rhetoric into effective policy tightening.” ING adds that this unease has been compounded by “Fed Chair Kevin Warsh's ambiguity about the reaction function,” which has “continued to weigh on USD, whose summer strength had been largely driven by Fed hike expectations.”