Sterling Rises as Fed and BoE Policy Paths Diverge

Key Moments

GBP/USD Supported by Softer Dollar Tone

GBP/USD is firmer after modest losses in the prior session, changing hands near 1.3310 during Asian trading on Tuesday. The pair is drawing support from a weaker US Dollar as traders increasingly anticipate that the Federal Reserve will keep interest rates unchanged at its October meeting.

In remarks last week, Federal Reserve Chair Kevin Warsh highlighted the robustness of the US economy but avoided signaling any specific path or timing for future policy moves. Market pricing has aligned with this cautious communication. Data from the CME FedWatch tool show fed funds futures suggesting the Fed is likely to hold rates steady in October, while assigning an 82.8% probability to a rate increase in December.

BoE Expectations Bolster Pound; UK Budget in Focus

Sterling is also benefiting from a gradual build-up in expectations for additional Bank of England tightening. Futures markets now reflect pricing for four 25-basis-point rate increases by July 2027, with the first move potentially occurring in November.

Attention is turning to the UK budget announcement due next week. Several large asset managers are positioning for a budget that emphasizes fiscal discipline, a scenario they expect would be supportive for UK government bonds. Gilt demand may strengthen further if Chancellor John Healey signals that public expenditure and borrowing will be kept under tight control.

Technical Picture: Consolidation Bias Around 1.33

On the daily chart, GBP/USD is trading at 1.3310 and maintains a mildly bearish short-term structure. Spot remains below the 50-day Exponential Moving Average (EMA) while holding above the nine-day EMA. The 14-day Relative Strength Index (RSI) sits at 51.26, close to the midpoint, pointing to a consolidative environment rather than a decisive trend. Sentiment as reflected in the FXS Fed Sentiment Index is broadly unchanged, offering little in the way of a new bullish driver.

Immediate resistance is seen at the 50-day EMA at 1.3349. A daily close above that level would be required to alleviate the prevailing downside bias and pave the way for a more durable rebound. On the downside, initial support is provided by the nine-day EMA at 1.3277. A sustained move below this level could open the door to lower prices, allowing sellers to reassert control and potentially extend the recent corrective phase.

Warsh Speech: Cautious Tone Despite Growth Themes

Fed Chair Warsh’s latest speech registered a score of 5.6/10 on the FXS Speechtracker, below the historical average score of 6.1/10 and indicative of a guarded message. The address referenced structural growth and an upswing in investment, yet was tempered by a risk-conscious stance, encapsulated in the comment about being “over-scarred from the global financial crisis.” This approach moderated the overall optimism around activity, labor markets, and inflation.

Warsh repeatedly declined to offer advance guidance on the October and December policy meetings, leaving the rate outlook deliberately unclear for Dollar-sensitive markets. His focus on themes such as artificial intelligence, investment-led expansion, and cross-border spillovers outlined a constructive longer-term backdrop, but without introducing new policy signals that would meaningfully adjust market rate expectations.

The FXS Fed Sentiment Index remained steady, moving 0.00 points to 127.51, a level that is still classified as hawkish. With the index well above 100 and the speech score slightly under the historical benchmark, investors are likely to interpret the overall tone as cautiously hawkish – supportive of the US Dollar, yet insufficient to trigger a broad revaluation of the Fed policy path.