Sterling Edges Lower as Fed Uncertainty Lifts Dollar

Key Moments:

Fed Rate Path Unclear as Dollar Firms

GBP/USD trades lower but remains in positive territory, hovering near 1.3290 during Asian hours on Tuesday after opening with a bullish gap. The pair is pressured as the US Dollar (USD) stabilizes amid investor caution ahead of the Federal Reserve’s policy announcement scheduled for Wednesday.

Data from the CME FedWatch Tool show that markets are assigning nearly a 38% probability to a rate increase in July, reflecting an unusually elevated level of uncertainty so close to the meeting. Citadel Securities expects the Fed to proceed with a rate hike to reinforce Chairman Kevin Warsh’s anti-inflation credentials, following his repeated commitments to restore price stability. Further out, the implied probability of at least a 25-basis-point move in September stands at approximately 81.4%.

Geopolitics and Oil Price Moves Support the Greenback

The US Dollar maintains resilience even after President Donald Trump said that the United States is holding “good talks” with Iran to address the Middle East conflict. Washington suspended its 13-night strike campaign over the weekend, resulting in three consecutive days without attacks. Tehran’s foreign ministry responded that there are no direct negotiations with the US, stating that its only ongoing discussions are with Oman regarding the future of the Strait.

Despite the conflicting messages, the diplomatic backdrop has contributed to a decline in oil prices, which in turn has eased broader concerns about inflation and the monetary policy outlook.

Lower Oil and Gilt Yields Weigh on the Pound

The British Pound (GBP) faces headwinds as the yield on the UK 10-year gilt falls toward 4.97%. The drop in yields comes alongside a pullback in crude oil prices from two-month highs, offering some relief on inflation and prompting money markets to slightly reduce expectations for additional Bank of England (BoE) rate hikes.

Attention is now turning to the BoE’s policy decision on Thursday. Policymakers are widely expected to keep the benchmark rate unchanged at 3.75%. That expectation is underpinned by recent data showing annual consumer price inflation slowing to a 15-month low of 2.6% in June, below the BoE’s own forecasts.