GBP/USD experiences depreciation as the Federal Reserve indicates additional rate hikes to address ongoing inflationary pressures. Markets currently assign a 56.5% probability to the prospect of an additional rate hike at the forthcoming October meeting. Scotiabank observes that the UK’s favourable political environment and commitment to fiscal responsibility persist in bolstering the Pound. GBP/USD experiences a slight decline following modest gains observed in the prior trading session, currently trading around 1.3390 during the Asian trading hours on Monday. The pair loses ground as the US Dollar maintains its position amid hawkish sentiment surrounding the Federal Reserve policy outlook. Last week, the US Federal Reserve implemented a 25-basis-point increase in interest rates, marking its first hike in three years. This decision was driven by the need to address inflation, with officials indicating the possibility of additional increases in the months ahead.
Fed Chair Kevin Warsh said that “the plain fact is that inflation is too high and has been for too long.” He added that “This summer’s inflation readings do not tell me that underlying trends have meaningfully improved.” Markets are currently assigning a probability of approximately 56.5% to the likelihood of an additional US rate hike during the Fed’s upcoming meeting in October, a notable increase from the nearly 42.5% observed just a week prior, as indicated by the CME FedWatch tool. Strategists observe that the political backdrop in the UK continues to support 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 sustained confidence in the authorities’ fiscal position is regarded as a crucial foundation for sentiment, even as markets assess the ramifications of recent Bank of England decisions and forthcoming data.
The FXS Speechtracker score of 7.2 compared to a historic 6.6 indicates a more hawkish-than-usual tone, influenced by the BoE’s clear warning that inflation risks are now skewed to the upside and that CPI is anticipated to surpass 4% in early 2027, in contrast to a previously expected peak of 3.2%. This hawkish tilt is underscored by the 3-vote dissent advocating for an immediate increase to 4%, alongside guidance suggesting that policy may need to tighten further should the Mideast conflict continue and second-round effects escalate. Meanwhile, the majority has chosen to maintain the rate at 3.75% and perceives minimal evidence of significant second-round inflation effects at this point.
On balance, the message conveys a conditional tightening bias rather than signalling an imminent hiking cycle. The stronger Q3 GDP at 0.4% and a modestly slower yet still substantial QT unwind at £46 billion annually indicate a steady, rather than aggressive, withdrawal of accommodation. The decision to pause APF gilt auctions until April 2027 and to maintain a substantial inventory of long-dated gilts until maturity indicates a strategic approach to managing balance-sheet risks. This development mitigates the aggressive inflation narrative and implies a cautious trajectory for the Pound, rather than an abrupt adjustment in UK rate expectations.
