Although Federal Reserve officials have signaled a hawkish stance, the pound is on track to rise against the dollar for a second consecutive session, trading near 1.3245 during Monday's (September 28) Asian hours. Traders are shifting their focus to this week's key economic indicators, including crucial U.S. employment data and the Fed's preferred inflation gauge. Markets are currently pricing a 65.9% probability of a Fed rate hike in October, up from 57.6% a week ago and 9.4% a month ago.
The dollar is weakening, but its downside is limited as Fed officials fret over sticky inflation. The greenback's decline may be capped, as several central bank officials have voiced concerns about persistent inflation. A number of Fed policymakers have continuously expressed worry over sticky inflation, providing a floor of support for the dollar. Cleveland Fed President Hammack warned last week that the public must not come to view persistently high prices as normal, stressing that the central bank must adopt restrictive policy to prevent inflation expectations from becoming unanchored. She noted that inflation has exceeded the target for several consecutive years, and if inertial thinking sets in, the cost of subsequent adjustment will rise significantly. Philadelphia Fed President Paulson expressed a similar stance, suggesting that a moderate further tightening may be needed. Market pricing for an October Fed rate hike has climbed to 65.9%, markedly above 57.6% a week ago and 9.4% a month ago. This shift in expectations directly enhances the dollar's rate appeal, limiting the scope for further weakness. For the pound against the dollar, the dollar's floor of support means upside potential is constrained. Investors need to closely watch upcoming Fed officials' remarks and inflation data; any signal reinforcing "higher for longer" will continue to support the dollar and thereby suppress the pound's appreciation potential. Overall, the hawkish pivot in monetary policy expectations has become the key anchor for the dollar's near-term trajectory.
Geopolitical uncertainty persists as Trump rejects Iran's proposal. Beyond monetary policy, Middle East geopolitical developments remain a market focus. Trump recently explicitly rejected Iran's proposal to reopen the Strait of Hormuz, saying Tehran overestimated its leverage, while noting that negotiations are expected to resume this week. Trump expressed confidence that the conflict with Iran will end soon, while keeping open the possibility of further military action before the midterm elections. As a critical global oil transit route, the navigational status of the Strait of Hormuz is directly tied to energy supply security. Trump's rejection stance has heightened short-term uncertainty, and market risk aversion has picked up somewhat. However, the dollar has not received significant additional support from this, suggesting that current exchange rates are driven more by interest rate expectations than by pure safe-haven demand. Investors are closely tracking the progress of negotiations; if the conflict escalates or talks break down, energy prices could come under renewed pressure, indirectly affecting global inflation expectations; if signs of de-escalation emerge, safe-haven buying could ease. Geopolitical uncertainty adds volatility to the market, but its near-term support for the dollar is limited, manifesting more as periodic fluctuations in risk premiums.
Bank of England officials' hawkish remarks lend support to the pound. The pound has recently drawn support from increasingly hawkish comments by Bank of England policymakers. BOE Governor Bailey warned that persistently high energy prices will make it difficult for the central bank to maintain the current interest rate level. He stressed that while the pass-through of energy shocks is still contained, the longer it persists, the harder it becomes to hold the no-hike stance. Monetary Policy Committee members Breeden and Lombardelli also said they are moving closer to supporting a rate hike, citing rising energy costs that could keep inflation above target. These remarks reinforce market expectations that the BOE may follow with tightening, providing rate-level support for the pound. In contrast, although the dollar has its own rate hike expectations for support, the pound's rate advantage has strengthened somewhat, partially offsetting the pressure from a stronger dollar. Against the backdrop of high energy prices, the UK's inflation risk has not been eliminated, and central bank officials' cautious hawkish stance helps stabilize the pound's exchange rate. Investors will closely watch upcoming UK inflation and energy data; any signal reinforcing the need for a rate hike could further support the pound. Overall, relative changes in policy expectations are becoming an important driver of the pound's near-term performance.
Bailey's remarks carry a dual logic: short-term tightening bias combined with a medium-term AI narrative, jointly supporting the pound. Bailey's warning that sustained high energy prices make it harder to maintain a no-hike stance, along with his attention to rising mortgage rates, clearly points to a cautious bias toward future policy tightening, directly supporting the pound. At the same time, Bailey views artificial intelligence as a possible positive shock in an era of negative supply shocks, introducing a constructive narrative for UK productivity and medium-term growth. He acknowledged that the pass-through of current energy prices to broader inflation remains contained, but stressed it is still at an early stage and vigilance is necessary. This stance keeps the pound highly sensitive to upcoming inflation and energy data. The AI-related comments provide a medium- to long-term optimistic perspective, helping ease concerns about the UK's growth outlook. Taken together, Bailey's remarks both reinforce short-term upside rate risks and inject positive expectations for economic transformation, with the dual logic jointly supporting the pound's exchange rate. Investors need to focus on tracking subsequent data verification to judge whether the policy path tilts further toward tightening.
In summary, markets are pricing a 65.9% probability of a Fed rate hike in October, providing a floor of support for the dollar. On the BOE side, Bailey warned that high energy prices make maintaining rates unchanged more difficult, and Breeden and Lombardelli are close to supporting a hike, offering rate support for the pound. Looking ahead, attention should be paid to U.S. employment data and the Fed's preferred inflation gauge, the evolution of the Middle East situation, UK inflation and energy data, and further remarks from BOE officials. If U.S. data supports the hawkish stance, the pound's upside against the dollar may be limited; if the BOE turns more hawkish, the pound could gain further support. (GBP/USD daily chart, source: E-Huitong) As of 11:36 Beijing time, GBP/USD stood at 1.3240/41.
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