Sterling Holds Steady Ahead of Bank of England Meeting

Sterling has steadied as traders await today’s Bank of England (BoE) decision, following a brief spike above $1.37 after the US Federal Reserve announcement. The pound later slipped back under $1.36, as market focus shifted to the BoE. Meanwhile, GBP/EUR continues to trade in a narrow range around 1.15–1.16, reflecting balanced expectations for both central banks. With no major economic data or policy surprises on the horizon, this range is expected to persist.

The post-Fed reaction in GBP/USD felt like a classic “buy the rumour, sell the fact” scenario, amplified by comments from Fed Chair Jerome Powell. Despite this, underlying policy divergence continues to support sterling: the Fed has begun easing, while the BoE remains cautious. A retest of the summer high at $1.3787 could be possible later this year, although a short-term pullback towards $1.35 cannot be ruled out.

The BoE is widely expected to maintain the Bank Rate at 4% and moderate the pace of quantitative tightening. A September rate cut was never on the cards, and recent economic data have done little to change that view. Market pricing currently assigns just a 2% probability of a reduction, with an 8–1 vote anticipated, leaving Alan Taylor as the likely lone advocate for a cut.

Looking ahead, any easing by the BoE is expected to be gradual. The August meeting minutes highlighted a close vote and a continued focus on inflation risks. While wage growth has slowed, services inflation remains elevated, and rising food and energy costs could embed inflation expectations further. Attention will likely centre on the approach to gilt sales, with the Monetary Policy Committee (MPC) expected to reduce next year’s target to around £75bn from £100bn and focus on shorter-dated maturities to minimise pressure on the long end of the curve.

US Dollar Strengthens After Powell Signals Caution

The US dollar rebounded sharply following the Fed press conference, erasing earlier losses and dragging EUR/USD down more than a cent from 1.1919 to roughly 1.181. Initially, the Fed’s 25-basis-point cut and softer policy statement had suggested a dovish tone. However, Powell’s Q&A tempered market expectations, emphasising that “there was not widespread support at all for a 50bp cut” and framing the decision as “risk management.” His comments highlighted committee divisions and the challenge of balancing growth with inflation.

The Fed’s Summary of Economic Projections reflected this careful balancing act. Officials still anticipate another half-point of easing by year-end and an additional quarter-point in 2026, slightly above the June forecast. Core PCE inflation is expected to remain sticky at 3.1% through 2025, while growth estimates were revised up to 1.6% for 2025 and 1.8% for 2026, indicating resilience despite softer employment indicators.

Powell avoided direct answers on political pressure or the role of Governor Stephen Miran, stressing that policy decisions will be data-dependent. His insistence that the Fed is “not on a pre-set course” helped anchor expectations for a more measured, data-driven easing cycle.

Markets reacted swiftly: ten-year Treasury yields, which had fallen after the initial statement, rebounded during the press conference, and the US dollar index (DXY) recovered from earlier lows. While traders still price in two more cuts this year, Powell’s cautious tone has reduced expectations for a faster pace, prompting recalibration across interest rates and foreign exchange markets.

Euro Consolidates as Fed Impact Remains Muted

EUR/USD briefly touched a new 2025 high at 1.1878 on Tuesday as investors positioned for Fed easing, but ended the session largely unchanged after Powell’s remarks strengthened the dollar. With nearly three rate cuts already priced in for this year, scope for further euro gains remains limited. The Fed’s messaging, although dovish, leaned toward caution, suggesting a slower pace of easing and limiting immediate downside pressure on the US dollar.

The euro remains supported above 1.18, which now acts as a key floor rather than resistance. The European Central Bank (ECB) stance is firmer than in July, when expectations of a Fed shift temporarily pushed EUR/USD higher without sustained follow-through. For the time being, the pair is likely to hover near current levels, though any deterioration in euro sentiment—such as setbacks in trade negotiations—could push it back below 1.18.

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