British Pound Gains as Softer Fed Rate Hike Bets Weaken US Dollar

The British pound strengthened against a weaker U.S. dollar on Friday, as currency traders scaled back expectations for further interest rate hikes from the Federal Reserve. The move was part of a broader dollar decline following a recent inflation report that has tempered the central bank's hawkish outlook.

Market Reaction

The pound's advance was primarily a reflection of dollar softness rather than any UK-specific economic news. As of 04:45 ET (08:45 GMT), the key currency pairs moved as follows:

• GBP/USD rose 0.26% to trade at 1.3521.
• EUR/USD gained 0.21% to 1.1553.

According to Francesco Pesole, an FX strategist at ING, the current market environment is marked by low volatility due to post-CPI summer trading conditions, a dynamic he expects to persist for the next couple of weeks.

Fed Policy in Focus

Ad

Market sentiment is shifting on the belief that conviction for another Fed rate increase is "too strong," Pesole noted, leading to a preference for "dollar downside." This follows mixed signals from Fed officials, with some continuing to argue for tightening while others have raised doubts about the need for higher rates.

Investors are now closely watching for commentary from more centrist Fed officials ahead of the central bank's late-August Jackson Hole Symposium, which is seen as the next major potential catalyst for policy signals. A decisive break higher for currencies like the euro would likely depend on Fed communication that "starts to surprise on the dovish side," Pesole added.

Economic Outlook

Looking ahead, the U.S. economic calendar on Friday includes July retail sales, forecast to show a modest 0.1% month-over-month increase, and the University of Michigan's consumer sentiment survey. In the eurozone, the second estimate of Q2 GDP is due, with no significant revision expected from the initial 0.4% quarterly growth figure.

For the euro, ING's models place its short-term fair value in the 1.1600-1.1650 range, with technical support strengthening around the 1.1500 level. However, a sustained move higher remains contingent on a clearer dovish pivot from the Federal Reserve.