The pound was little changed on Thursday morning, with GBP/USD trading at 1.3381, up just 0.01%, as currency markets paused ahead of the Bank of England's interest rate decision due later in the day.
Sterling's movement was driven almost entirely by the dollar's trajectory rather than domestic developments. The US dollar index (DXY) rose 0.6% to a two-month high on Wednesday after the Federal Reserve delivered a 25-basis-point rate hike — its first increase since 2023 — accompanied by a hawkish dot plot. Twelve of 18 FOMC members project at least one more hike this year, while four forecast two additional increases. Two-year USD swap rates jumped 10–12 basis points following the decision, and markets now price 13 basis points of tightening for October and 32 basis points by December.
Fed Chair Kevin Warsh described the move as reducing a "dose of accommodation" while reiterating a commitment to price stability.
Francesco Pesole, FX strategist at ING, said the dollar rallied across the board but noted that "risks are more balanced for the USD now that the monetary policy boost has been absorbed," adding they remain tilted to the upside in the near term.
The Bank of England is widely expected to hold interest rates at 3.75% when it announces its decision on Thursday, with consensus pricing implying just 2 basis points of tightening. A 6-3 vote split is anticipated. Pesole said there was "little evidence that the six doves are moving in that direction" and questioned whether Governor Andrew Bailey would signal any discomfort with current market pricing.
Elsewhere, EUR/USD gained 0.03% to 1.1468, while the euro-dollar fair-value model at ING has fallen to 1.150, down 1% over the past week. The summer low for EUR/USD came in the 1.132–1.135 area, an floor Pesole said is unlikely to see strong technical support before being tested again given the two-year swap rate differential widening by 15 basis points to its widest since July.
EUR/GBP targets from ING and UBS diverge, with ING forecasting 0.87 by year-end versus UBS's 0.85 view. USD/JPY is expected by ING to find support above 155 and stabilize near 156–157.
The dollar's broader direction remains closely tied to geopolitical developments, particularly the situation in the Gulf. Oil prices continue to act as a key swing factor, with elevated energy costs offsetting some of the support from the European Central Bank's hawkish tone. A de-escalation in US-Iran tensions and a sustained fall in oil prices could shift the dollar's bullish bias.
