Sterling Gains as Hawkish BoE Offsets Softer Dollar

Key Moments

GBP/USD Supported by BoE Outlook and UK Policy Signals

GBP/USD extends its advance for a third consecutive session, trading around 1.3400 during Asian hours on Friday. The move reflects sustained strength in the British Pound as market participants position for a potentially more hawkish Bank of England policy decision next week.

Market pricing indicates expectations that the BoE will raise rates by 25 basis points in November, with another increase anticipated in February. In parallel, UK Finance Minister John Healey has outlined plans to increase rates on banks, gambling, savers, landlords, and online shopping, while also presenting measures aimed at addressing elevated energy costs.

Dollar Pressured by Softer Safe-Haven Flows and Easing Geopolitical Risk

The upside in GBP/USD is also being reinforced by pressure on the US Dollar. Diminishing safe-haven demand is weighing on the greenback as investors focus on prospects for US-led diplomatic efforts aimed at peace talks. Signs of easing Middle East tensions have helped temper worries about oil supply disruptions and inflation risks, in turn dampening expectations for a Federal Reserve rate increase at the December meeting.

Traders are currently assigning nearly a 75% probability to a 25-basis-point Fed rate hike, down from 84.2% just one day earlier. While this represents a notable repricing of December expectations, the implied odds still indicate a meaningful chance of further tightening.

Resilient US Data Caps Dollar Losses

Despite recent headwinds, the Dollar remains underpinned by solid US macroeconomic data. Preliminary Gross Domestic Product came in at 3.4% YoY, above the 3.2% consensus and stronger than the prior quarter’s 2.2%, supported by consumer spending growth of 3.8% YoY.

The Federal Reserve’s preferred inflation gauge, the Core PCE Price Index, increased 3.1% YoY in line with forecasts. At the same time, initial jobless claims edged down to 194K, signaling a firm labor market and reinforcing the view of a still-heating economy.

Warsh Remarks Reinforce Higher-for-Longer Fed Narrative

Warsh’s latest press conference delivered a distinctly hawkish tone, reflected in a 7/10 FXS Speechtracker score that aligns with the historical average but is bolstered by repeated, firm commitments to maintaining 2% PCE price stability. The insistence that “ensuring price stability is not about a fixed date on a calendar” and that “new monetary medicine” is functioning as intended, together with comfort around inflation expectations and tighter financial conditions, signals a data-dependent yet resolutely anti-inflation stance that is broadly supportive of the US Dollar.

Comments on widening credit spreads, the drag from higher rates on technology and AI, and broader capital expenditure suggest confidence that policy tightening is having an impact without yet endangering economic expansion. This backdrop leaves the Fed inclined to keep policy in restrictive territory.

The FXS Fed Sentiment Index leapt by +14.39 points to 141.89, well into hawkish territory and significantly above the neutral 100 mark. This elevated reading, consistent with the FXS Speechtracker’s assessment, indicates that markets are likely to interpret Warsh’s communication as reinforcing a higher-for-longer rate regime, a scenario that generally supports the Dollar, particularly against the Euro and Yen.