British Pound slips as hawkish Fed outlook boosts US Dollar

GBP/USD inches lower after registering modest gains in the previous trading day, hovering around 1.3390 during Asian hours on Monday. The pair loses ground as the US Dollar (USD) holds ground amid hawkish sentiment surrounding the Federal Reserve (Fed) policy outlook. Last week, the US Federal Reserve delivered a 25-basis-point rate hike, its first hike in three years, as officials sought to curb inflation and flagged more hikes in the coming months.

Fed Chair Kevin Warsh said that "the plain fact is that inflation is too high and has been for too long." "This summer's inflation readings do not tell me that underlying trends have meaningfully improved," he added. Markets are now pricing in nearly a 56.5% chance of another US rate hike when the Fed meets next in October, compared with nearly 42.5% a week ago, according to the CME FedWatch tool.

UK political backdrop stays supportive as markets trust fiscal stance

Strategists at Scotiabank note that the political backdrop in the UK remains a tailwind for the Pound, with “the narrative remains constructive as market participants and media signal ongoing confidence in the government’s efforts to maintain their commitment to fiscal responsibility.” This continued faith in the authorities’ fiscal stance is seen as an important underpinning for sentiment, even as markets weigh the implications of recent BoE decisions and incoming data.

BoE flags stronger inflation risks but sticks to gradual tightening path

The FXS Speechtracker score of 7.2 versus a historic 6.6 points to a more hawkish-than-usual tone, driven by the BoE’s explicit warning that inflation risks are now tilted to the upside and that CPI is expected to exceed 4% in early 2027 versus a 3.2% peak previously. This hawkish tilt is reinforced by the 3-vote dissent for an immediate hike to 4% and guidance that policy may have to tighten further if the Mideast conflict persists and second-round effects rise, even as the majority opted to hold at 3.75% and still sees little evidence of material second-round inflation effects so far.

On balance, the message is one of conditional tightening bias rather than an imminent hiking cycle, with stronger Q3 GDP at 0.4% and a modestly slower but still sizeable QT unwind at £46 billion a year shaping a steady, not aggressive, withdrawal of accommodation. The decision to pause APF gilt auctions until April 2027 and to hold a large stock of long-dated gilts to maturity signals a desire to manage balance-sheet risks carefully, which tempers the hawkish inflation rhetoric and suggests a measured path for the Pound rather than a sharp repricing of UK rate expectations.