Pound Extends Rally as Softer Fed Bets Weigh on Dollar

Key Moments

Dollar Weakens as Fed Tightening Bets Recede

GBP/USD is extending its upward run for a ninth consecutive session, hovering around 1.3390 during Asian trading on Tuesday. The pair is benefiting from renewed pressure on the US Dollar as investors pull back from earlier expectations of Federal Reserve rate hikes this month and in September.

The change in market positioning follows a softer employment report that showed fewer jobs were added in April, May, and June than Wall Street had projected. This has tempered the perceived need for additional near-term Fed tightening.

A recent pullback in crude oil prices, attributed to increased OPEC+ output and a US-Iran peace deal, has also helped ease broader inflation concerns, further reducing the urgency for a more aggressive Fed stance.

Waller’s Remarks Reinforce Hawkish Fed Credibility

Despite the softer macro backdrop, the Dollar may still draw some support from comments by Federal Reserve Governor Christopher Waller and from resilient domestic data.

Fed’s Waller delivers a moderately stronger-than-usual performance, with a 7.1/10 FXS Speechtracker score compared to the established baseline of 6.4/10, emphasizing both the usefulness and the pitfalls of forward guidance. The focus on forward guidance as a “valuable tool” that can accelerate policy transmission, yet becomes a hindrance when too rigid or when facing multiple plausible economic paths, signals a preference for more flexible communication and reinforces the importance of a well-understood reaction function. Waller’s insistence on the credibility of the 2% inflation pledge, rejection of keeping rates low to aid deficit financing, and preference for an inflation target range (without changing the current target) collectively lean hawkish for the Dollar, even without explicit comments on the near-term outlook.

The FXS Fed Sentiment Index rose by 1.83 points to 125.72, confirming a move further into hawkish territory relative to the neutral 100 benchmark. This upward shift, aligned with the above-baseline FXS Speechtracker score, suggests markets will read Waller’s remarks as reinforcing the Fed’s anti-inflation stance and limiting expectations for policy accommodation, a backdrop that tends to support the Dollar against other major currencies.

US Services Data Remains in Expansion

Business activity in the US services sector has eased slightly but remains solidly expansionary. The June ISM Services PMI came in at 54.0, matching consensus expectations.

Within the survey, the Prices Index slipped from 71.3 to 67.7, pointing to some moderation in cost pressures. At the same time, the Employment Index improved notably, moving out of contraction from 47.9 to 51.2.

BoE Expectations Repriced as UK Outlook Softens

While the Pound is currently supported against the Dollar, it is not without its own challenges. Market participants have scaled back projections for Bank of England tightening, with pricing now reflecting only a 70% likelihood of a single rate increase this year, compared with expectations for two hikes just a few weeks earlier.

BoE Governor Andrew Bailey has recently reiterated that inflation is still expected to return to the 2% target, but he conceded it is likely to do so more slowly than previously thought and clearly dismissed the prospect of imminent rate cuts.

This stance follows the BoE’s monetary policy decision on June 18, when policymakers voted 7-2 to maintain the benchmark interest rate at 3.75%. Although the headline rate was left unchanged, the number of officials favoring an immediate hike to 4.00% has doubled since April, signaling a strengthening hawkish bloc within the committee.

UK inflation currently stands at 2.8%, but internal BoE projections indicate it could move back above 3% by autumn, reflecting the delayed impact of earlier war-related energy costs. Against this backdrop, major sell-side institutions now anticipate the next rate increase around late 2026.

Background on the Pound Sterling

The article also provides general context on the Pound Sterling (GBP), its role in foreign exchange markets, and the key drivers of its valuation.

Pound Sterling: Structure and Key FX Pairs

The Pound Sterling (GBP) is described as the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is characterized as the fourth most traded unit in global FX markets, accounting for 12% of all transactions, with an average daily turnover of $630 billion based on 2022 figures.

The main GBP currency pairs highlighted are:

• GBP/USD (“Cable”), representing 11% of FX volumes
• GBP/JPY (“Dragon”), accounting for 3%
• EUR/GBP, representing 2%

The Pound Sterling is issued by the Bank of England.

How Bank of England Policy Shapes GBP

The single most important influence on the Pound’s value is identified as Bank of England monetary policy. The BoE’s decisions center on achieving “price stability,” defined as an inflation rate around 2%, primarily via adjustments in interest rates.

When inflation is elevated, the BoE may raise rates, increasing borrowing costs for households and businesses. This is generally viewed as supportive for GBP because higher yields can make UK assets more attractive to global investors.

When inflation is too low, signaling slower economic growth, the BoE may consider cutting rates to reduce borrowing costs and stimulate investment and activity.

Economic Data and Trade Balance as GBP Drivers

Economic releases such as GDP, Manufacturing and Services PMIs, and labor market data are noted as important gauges of economic health, with implications for the Pound’s direction.

• Stronger data can boost Sterling by attracting foreign capital and potentially prompting tighter BoE policy.
• Weaker data can weigh on the currency as it may point to slower growth and less need for higher rates.

The Trade Balance is also highlighted as a key indicator. It measures the difference between export earnings and spending on imports over a given period.

A positive Trade Balance, driven by robust demand for a country’s exports, tends to support its currency due to increased foreign demand. Conversely, a negative balance can be a headwind for the currency.