Sterling ended last week firmer after both the Federal Reserve and the Bank of England held rates but leaned hawkish. The Fed held in a 9-3 vote with three members favouring a hike, and the BoE followed with a 6-3 hold, a wider tightening minority than the 7-2 markets had expected, as Catherine Mann joined the dissenters. The pound rallied close to 1% against a broadly weaker dollar, which was also pressured by suspected intervention to support the yen and a soft US growth reading.
The gains faded slightly into Friday as investors questioned the hawkish read, with Governor Bailey pushing back on the idea of a near-term hike. With a quieter domestic calendar this week, US labour market data is likely to set the tone, culminating in Friday’s payrolls.
A hawkish hold, but not a signal to tighten
The Bank of England’s decision was the domestic highlight. The headline was a hold at 3.75%, but the 6-3 vote split carried the message: markets had expected 7-2, and Catherine Mann’s move to join Megan Greene and Huw Pill in seeking a hike to 4% pointed to a committee edging closer to tightening than assumed. The initial reaction lifted sterling. However, Governor Bailey used the press conference to temper that interpretation, cautioning that while a prolonged energy-driven rise in inflation could eventually warrant higher rates, the Bank was not preparing markets for an imminent move. Several analysts echoed that the split overstated the hawkish shift, and sterling handed back part of its initial gains into the end of the week.
Dollar pressured on several fronts
The dollar was the week’s clear underperformer. The Fed held rates in a 9-3 vote, with three members preferring a hike and Chair Warsh reaffirming that returning inflation to target remains the priority. Because markets had priced a meaningful chance of an increase, the hold itself read as a modest drag on the dollar rather than a support. That pressure was compounded by suspected official intervention to strengthen the yen, which drove sharp moves across dollar pairs, and by a soft first estimate of US second-quarter GDP at 1.5%, below the 2.1% expected. The Fed’s preferred core PCE inflation gauge held firm, keeping the higher-for-longer narrative intact even as the growth data softened.
Sterling and the euro
For GBPUSD, the combination of a hawkish-leaning BoE and a broadly weaker dollar drove the bulk of the near 1% weekly gain, though the pair drifted off its highs as the hawkish read was questioned. GBPEUR was more subdued: sterling firmed early in the week but the euro found its own support from firmer eurozone inflation, which rose to 2.9% in July on an energy-driven surge, with core inflation edging up to 2.5%. That reading keeps pressure on the European Central Bank ahead of its September meeting and limited sterling’s progress against the single currency.
The week ahead
Tuesday 04 August
- (US) ISM Services PMI
- (UK) BoE Financial Stability Report
Wednesday 05 August
- (US) ADP Employment Change
- (US) FOMC Minutes
- (EU) Eurozone Retail Sales (Jun)
Thursday 06 August
- (EU) Germany Industrial Production (Jun)
Friday 07 August
- (US) Non-Farm Payrolls and Unemployment Rate
With the US labour market in focus and a lighter domestic calendar, it may be worth speaking to your currency specialist about strategies for managing exposure around Friday’s payrolls.
