British Pound gains as US Dollar weakens despite Fed rate hike odds surge

GBP/USD inches higher after posting minor losses in the previous day, trading around 1.3520 during Asian hours on Monday. The currency pair gains ground as the US Dollar (USD) struggles, possibly driven by a Goldman Sachs report emphasizing that this week's inflation data will be pivotal. Goldman Sachs expects a benign Consumer Price Index (CPI) reading to keep the Federal Reserve (Fed) on hold, even though August's solid job numbers removed one key obstacle to a potential rate increase.

According to the US Bureau of Labor Statistics (BLS), Nonfarm Payrolls (NFP) rose by 162,000 in August, easily beating market expectations of 56,000 and accelerating from an upwardly revised 21,000 increase in July. Meanwhile, the Unemployment Rate held steady at 4.1%.

Despite the Greenback's current weakness, its downside may be limited as strength in the labor market prompted traders to boost their rate hike expectations for September. The CME FedWatch tool shows the odds of a 25-basis-point Fed rate hike rising to nearly 58.3%, up from 50.2% before the jobs report.

Across the Atlantic, markets are fully pricing in a Bank of England (BoE) rate hike by the end of the year, with another increase anticipated by March 2027 due to ongoing concerns over UK fiscal sustainability and sticky inflation.

Pound support underpinned as BoE tone turns more hawkish

Analysts at Scotiabank highlight that recent commentary from BoE officials has become more supportive for the British Pound, noting that “messaging from MPC policymakers has taken a somewhat hawkish turn.” They point in particular to “notable comments from Chief Economist Huw Pill,” who is seen “seeking to manage the extent of pricing favored by markets while still leaning toward hikes overall,” a combination that, in Scotiabank’s view, helps underpin expectations for further policy tightening and offers a constructive backdrop for GBP performance.