GBP/USD experiences an uptick as the US Dollar faces challenges following disappointing US economic data, which leads markets to reduce expectations for Federal Reserve rate increases. The outlook for Federal Reserve policy appears to be moderating, influenced by a cooling employment report and declining crude oil prices that alleviate inflationary pressures. The British Pound may encounter challenges as markets reduce expectations from two interest rate hikes to merely a 70% probability of one. GBP/USD maintains its upward momentum for the ninth consecutive day, currently trading near 1.3390 during the Asian session on Tuesday. The currency pair rises as the US Dollar faces headwinds due to market participants scaling back expectations for Federal Reserve rate hikes this month and in September. This shift in sentiment followed a cooling employment report that indicated fewer jobs were added across April, May, and June than Wall Street had anticipated. Furthermore, a recent decline in crude oil prices, influenced by an OPEC+ production increase and a US-Iran peace agreement, has eased wider inflationary pressures, reducing the necessity for a stringent Fed policy perspective.
The Greenback could find baseline support from hawkish remarks by Federal Reserve Governor Christopher Waller and resilient domestic economic data. Fed’s Waller presents a performance that is notably stronger than the norm, achieving a score of 7.1 out of 10 on the FXS Speechtracker, surpassing the established baseline of 6.4 out of 10. He underscores the value and the potential drawbacks of forward guidance. The emphasis on forward guidance as a “valuable tool” that can expedite policy transmission, yet becomes a constraint when overly rigid or confronted with various plausible economic trajectories, indicates a preference for more adaptable communication and underscores the significance of a clearly understood reaction function. Waller’s emphasis on maintaining the credibility of the 2% inflation pledge, his dismissal of the notion to keep rates low to support deficit financing, and his inclination towards an inflation target range (while not altering the existing target) collectively suggest a hawkish stance for the Dollar, even in the absence of direct remarks regarding the near-term outlook.
The FXS Fed Sentiment Index increased by 1.83 points to 125.72, indicating a shift further into hawkish territory compared to the neutral benchmark of 100. This upward shift, aligned with the above-baseline FXS Speechtracker score, suggests that markets will interpret Waller’s remarks as reinforcing the Fed’s anti-inflation stance and constraining expectations for policy accommodation, a context that typically bolsters the Dollar against other major currencies. Despite a slight cooling in business activity within the United States services sector, it continued to exhibit robust expansion, as evidenced by the June ISM Services Purchasing Managers’ Index, which recorded a value of 54.0, aligning with consensus estimates. Within the sub-components of the report, the Prices Index decreased from 71.3 to 67.7, whereas the Employment Index experienced a significant enhancement, rising from 47.9 to 51.2, thus exiting contractionary territory. On the other side of the equation, the British Pound could face its own pressures as markets lowered expectations for Bank of England tightening. Investors are currently factoring in a mere 70% probability of a solitary rate increase this year, a significant drop from the two hikes projected only a few weeks prior.
BoE Governor Andrew Bailey recently confirmed that inflation is on course to meet the bank’s 2% target; however, he acknowledged that this will take longer than previously anticipated and decisively ruled out any imminent rate cuts. This prudent strategy comes in the wake of the BoE’s monetary policy meeting on June 18, during which officials cast their votes 7-2 to maintain the benchmark interest rate at 3.75%. While the current situation remains unchanged, the number of hawkish members has increased significantly since April, with two dissenting voters advocating for an immediate increase to 4.00%. Currently, UK inflation is at 2.8%. However, internal projections from the central bank suggest it may rise above 3% by autumn, attributed to the delayed pass-through of energy costs from the war era. This outlook has prompted major sell-side institutions to predict the next rate hike will occur around late 2026.