Sterling Holds Above $1.34 as Hawkish Fed Bets Buoy US Dollar

The British pound held steady against the U.S. dollar on Wednesday, trading above the key $1.34 level as the greenback's broad strength capped gains for major currencies. As of 04:28 ET (08:28 GMT), the GBP/USD currency pair was trading at 1.3466, up approximately 0.13% on the day.

Dollar Strength Defies Risk-On Sentiment

The U.S. dollar's resilience is a primary factor influencing currency markets, according to analysis from ING. The Dollar Index (DXY) is holding firm near the 100 mark despite a wider improvement in market risk appetite, a dynamic that would typically pressure the U.S. currency. This strength is attributed to lingering market expectations that the Federal Reserve could still implement an interest rate hike on September 16.

Markets have slightly reduced the probability of a Fed move, pricing in around 14 basis points of tightening, down from 16-17 basis points earlier in the week following softer JOLTS job openings data. However, investors remain cautious ahead of Friday's pivotal U.S. nonfarm payrolls report for July, with today's ADP employment and ISM services data also in focus.

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Dovish BoE Commentary Caps Pound's Upside

Sterling's current stability is not being driven by new domestic factors, with the market still digesting commentary from last week's Bank of England (BoE) meeting. While the BoE's 6-3 vote to hold rates was narrower than the 7-2 split analysts had anticipated, Governor Andrew Bailey's subsequent remarks downplayed the likelihood of near-term tightening.

Policymakers also signaled that rate cuts could be considered if Middle East tensions continue to de-escalate, a dovish undertone that has prompted markets to pare back bets on a rate hike in 2026. This stance contrasts with the hawkish sentiment surrounding the Federal Reserve, creating a policy divergence that is limiting the pound's potential gains.