GBP/USD Slides to 1.3390 as Fed Hike Odds Rise
GBP/USD drops to 1.3390 as markets price in a 56.5% chance of a new US rate hike in October.
Key points
- GBP/USD dropped to 1.3390 as the US Dollar strengthened following a hawkish Federal Reserve outlook.
- The CME FedWatch tool shows a 56.5% probability of a US rate hike at the October meeting.
- The Bank of England held rates at 3.75% but raised its CPI peak forecast to over 4% by early 2027.
GBP/USD fell to 1.3390 during Monday’s Asian trading session. The decline followed a hawkish signal from the Federal Reserve regarding its future policy path.
Market participants now assign a 56.5% probability to another rate hike in October. This figure represents a significant jump from the 42.5% recorded just one week prior.
Fed hawkishness drives dollar strength
The Federal Reserve hiked rates by 25 basis points last week. This move marked the first increase in three years to combat persistent inflation.
Chair Kevin Warsh stated that inflation has remained too high for too long. He argued that recent data does not show meaningful improvement in underlying trends.
Bank of England maintains cautious stance
The Bank of England kept its policy rate steady at 3.75%. The central bank expects CPI to exceed 4% in early 2027, a higher peak than previously projected.
Three dissenting votes supported an immediate hike to 4% instead. The majority view remains that evidence for material second-round inflation effects is still limited.
Fiscal responsibility supports sterling outlook
Scotiabank analysts note that the UK political backdrop remains constructive for the Pound. They cite ongoing market confidence in the government’s commitment to fiscal responsibility.
The Bank of England plans to pause gilt auctions until April 2027. This measure helps manage balance-sheet risks while maintaining a measured approach to monetary policy.
