Pound Sterling Rises as Weaker Dollar Outweighs UK Gilt Concerns

The British pound gained against the U.S. dollar on Friday, rising alongside the euro, as the greenback weakened across the board following dovish comments from a key Federal Reserve official that tempered expectations for a near-term interest rate hike.

As of 3:48 AM ET, the GBP/USD pair was up 0.15% to 1.3545, according to data from Investing.com.

Dollar Softens on Fed Rate Outlook

The dollar's slide was triggered by remarks from Federal Reserve Governor Christopher Waller, who signaled a higher bar for a September rate increase, shifting the focus to upcoming August inflation data. His comments were perceived as more dovish than the market anticipated, leading to a 5-basis-point drop in short-term U.S. Treasury yields.

Market pricing for a September rate hike from the Fed now stands at a 50% probability, the source noted. Chris Turner, Global Head of Markets at ING, stated that investors are leaning toward a limited Fed hiking cycle, creating "mild negative pressure on the dollar in the short term." He added that the dollar could see further modest declines unless Friday's U.S. non-farm payrolls report is exceptionally strong.

Pound's Rally Masks Domestic Headwinds

Ad

Sterling's advance was driven by external factors rather than an improvement in the UK's domestic fundamentals. Analysts at ING attributed recent pressure on the pound to a sell-off in UK government bonds (gilts) and persistent worries over the state of the country's public finances.

Focus is turning to upcoming UK policy events. The new Chancellor, John Healey, is expected to deliver his first major policy speech early next week with an emphasis on fiscal responsibility. On the monetary front, markets are awaiting a survey from the Bank of England's Decision Maker Panel and a speech from Governor Andrew Bailey. According to ING, UK money markets continue to price in up to 60 basis points of further monetary tightening from the central bank to combat inflation.

Market Outlook

Traders are now squarely focused on the U.S. non-farm payrolls data for further direction. The consensus forecast is for 55,000 new jobs, though some private estimates are reportedly closer to 30,000. ING analysts maintain their baseline forecast for a 25-basis-point Fed rate hike later this year, suggesting the dollar will likely "remain relatively stable" toward year-end, with inflation data being a more critical driver than employment figures.

In the cross-currency market, ING forecasts the EUR/GBP pair will trade in a range of 0.8550 to 0.8600 in the near term. They see potential for a move higher toward 0.87 in the fourth quarter if the Bank of England's tightening cycle stalls further.