The British pound clawed its way back into the spotlight today, strengthening to its highest level against the U.S. dollar in over a week at approximately $1.3443, as traders piled into the currency on mounting expectations of a more accommodative U.S. Federal Reserve.
The move, which saw GBP/USD rise 0.21% in the session, underscores a widening transatlantic policy divergence: while the Fed signals imminent rate relief amid softening U.S. jobs data, UK short-term bond yields remained anchored, with economists increasingly convinced that the Bank of England (BoE) will hold fire on cuts until early next year.
This sterling rebound caps a turbulent month for the pound, which has shed 1.45% against the dollar since mid-September amid sticky domestic inflation and fiscal jitters. Yet today's gains – the strongest single-day pop since early October – reflect a broader market recalibration, where a dovish Fed tilt is eroding the greenback's safe-haven allure and spotlighting the UK's relative policy restraint as a source of currency strength.
Fed's Dovish Pivot: A Tailwind for Cable
At the epicenter of the pound's rally lies a sea change in U.S. monetary expectations. With the Federal Open Market Committee (FOMC) convening October 28-29, markets are pricing in a near-certain 25-basis-point trim to the federal funds rate, bringing it to 3.75%-4.00% – the lowest since December 2022. The CME FedWatch Tool pegs the odds at 97%, up from 93% just days ago, driven by fresh signs of labor market fragility: August's core PCE inflation eased to 2.9%, but unemployment ticked higher, prompting Fed Chair Jerome Powell to hint at "elevated downside risks" in recent testimony.
Wall Street heavyweights have piled on the dovish bets. Bank of America shifted its first-cut call forward to October from December, citing a "cooling labor market" exacerbated by the ongoing U.S. government shutdown, which has furloughed 40% of federal workers and delayed key data releases. Goldman Sachs and Morgan Stanley now foresee dual cuts at both October and December meetings, with the fed funds rate dipping toward 3% by mid-2026. The September FOMC minutes, released earlier this month, revealed a fractured board: while the median dot plot calls for 50 basis points of easing by year-end, dissenters like Governor Michael Barr warn of inflation's "stubborn" hold above 2%, potentially delaying deeper cuts.
For GBP traders, this Fed softening is manna from heaven. A weaker dollar – down 0.38% against a basket of currencies today – amplifies sterling's appeal, especially as the pair flirts with its 2025 high of $1.3743 set in July. "The pound's resilience stems from the Fed's pivot contrasting sharply with the BoE's hawkish hold," noted Susannah Streeter, head of money and markets at Hargreaves Lansdown. "Cable could test $1.35 if U.S. data disappoints further."
UK Yields Steady Amid Inflation Stubbornness
Across the pond, Britain's fixed-income markets tell a tale of caution. Short-term UK gilt yields – a barometer for near-term rate bets – held firm around 4.55% for the 10-year benchmark as of yesterday's close, dipping just 0.04 points in a session of muted trading. This stability masks deeper anxieties: despite earlier cuts, the yield curve has steepened markedly in 2025, with 30-year yields at 5.35% reflecting investor skepticism over fiscal sustainability and persistent price pressures.
The Bank of England's base rate sits at 4.00% following August's narrow 5-4 vote to trim from 4.25% – the fifth cut in 12 months, yet the most divisive in MPC history. Inflation, while cooling from peaks, remains a thorn: headline CPI is forecast to spike to 3.8% in September before easing toward 2% only in early 2026, fueled by food and energy volatility. Services inflation, a BoE obsession, lingers at 5.0% through year-end, per Goldman Sachs estimates.
Rate Cut Horizon Slips to 2026: A Consensus Emerges
As a result, the chorus of economists is harmonizing on delay. Markets now assign slim odds – under 50% – to a November BoE cut, with swap rates implying the base rate holds at 4% through December before dipping to 3.90% by January 2026. HSBC and Investec peg the next easing at April 2026, while Pantheon Macroeconomics sees rates pinned at 4% for the next year outright, citing the MPC's battle to tame inflation back to target.
Deutsche Bank offers a more aggressive outlook, forecasting a slide to 3.25% by early 2026 – one of the slowest post-war easing cycles – as unemployment rises and wage growth slackens. Nomura echoes this, eyeing quarterly trims to a 3.50% terminal rate by February. Even bullish Goldman Sachs, which once floated six cuts by spring 2026, now tempers to three sequential moves starting February, projecting 1.1% GDP growth amid trade headwinds.
Governor Andrew Bailey's rhetoric underscores the bind: "We're not there yet on inflation persistence," he noted post-August, with the OECD aligning on gradual easing to 3.5% by mid-2026. This "higher for longer" stance, juxtaposed against the Fed's haste, bolsters sterling but squeezes UK borrowers: mortgage rates hover above 4%, and GDP forecasts have been halved to 0.75% for 2025 by the Office for Budget Responsibility.
For households and businesses, the mixed signals spell caution. A robust pound aids importers and holidaymakers but erodes export competitiveness, particularly as U.S. tariffs loom under a potential Trump return. Equity markets shrugged off the currency pop, with the FTSE 100 flat, while gilt funds eye short-dated bonds for outperformance amid the steepening curve.
As November's BoE meeting looms, the pound's fate hinges on dueling inflation prints and Fed follow-through. "Sterling's strength is real, but fragile," warns Quilter Cheviot's Richard Carter. "A BoE hold through year-end could propel it toward $1.36 – or a U.S. rebound could reverse it all." In this high-stakes forex tango, Britain's currency is dancing to a distinctly dovish American tune, with UK policymakers firmly leading from the rear.