GBP/USD turned short-term bullish after the BoE’s surprise hawkish cut to 4.00% on a narrow 5–4 vote, sharply reducing November cut odds and lifting Sterling above 1.3400. Strong inflation focus and reduced easing expectations support dips, while USD weakness from soft US data and high September Fed cut odds adds momentum. Longer-term growth risks may cap upside.

GBP: Short term bullish

The British Pound broke out of its recent range this week after the Bank of England delivered an unexpected hawkish twist that forced markets to rethink the UK interest rate outlook. Sterling started the week trading quietly near 1.3300 against the dollar as investors waited for Thursday’s policy decision, with expectations firmly set on a dovish 25bps cut. While the MPC did cut rates to 4.00% as forecast, the outcome was far more hawkish than anticipated, with the decision passing on a razor-thin 5-4 vote. Four members voted to hold rates, showing a stronger-than-expected resistance to further easing. This surprise dissent shattered the assumption of a smooth, quarterly pace of cuts and sparked a sharp rally in Sterling, sending GBP/USD above 1.3400 to multi-week highs. Traders quickly scaled back bets on a November cut, leaving the Pound ending the week on much stronger ground, supported by the perception of a more inflation-focused central bank.

The BoE vote split was the key event of the week. The narrow 5-4 result was much closer than the expected 7-2, revealing a sizable hawkish faction concerned about persistent inflation. The decision required a second round of voting after an initial 4-4-1 split, with member Taylor changing his stance from a 50bps cut to a 25bps cut to break the deadlock. Following the announcement, markets aggressively reduced expectations for further cuts. The odds of a November move dropped from around 64% to below 50%, with a full 25bps cut not priced in until February 2026. Chief Economist Huw Pill, one of the dissenters, reinforced the hawkish tone on Friday, citing a rise in longer-term inflation risks and changes in price and wage-setting behavior as reasons for caution. While the MPC statement dropped its earlier guidance that policy “needs to remain restrictive,” it maintained a “gradual and careful” approach, with inflation forecasts revised higher. The statement’s softer elements were completely overshadowed by the unexpectedly close vote.

Economic data provided some minor background support. Final July PMIs were revised higher, with services rising to 51.8 and the composite to 51.5, although the impact was muted ahead of the BoE decision. On the other hand, construction activity disappointed sharply, with the sector’s PMI dropping to 44.3, showing a steep contraction. In the fiscal space, the NIESR warned that Chancellor Reeves faces a GBP 50bn shortfall in public finances that could require immediate tax hikes, but this had little influence on market pricing compared to the week’s central bank developments.

Overall, the Pound’s surge was driven almost entirely by the BoE’s hawkish surprise, with markets now expecting a slower, more cautious path of easing than previously assumed.

As of Sunday, the markets assign an 86% probability to holding rates steady and a 14% probability to a 25‐bps rate cut by the BoE at its September 18th meeting. The interest rate path is higher compared to last week, and the markets are pricing in 32‐bps of rate cuts over the next five meetings. Sterling firmed after the BoE’s hawkish surprise, with the close vote and tougher inflation tone forcing a rethink on the pace of cuts and sparking short covering before momentum cooled as growth worries and event risk crept back in.

Near term, our bias is weak bullish, the split vote and inflation risk messaging should keep dips supported while positioning normalizes, provided broader risk stays steady and incoming data doesn’t undercut the narrative.

For the longer term outlook, we lean weak bearish. Growth headwinds, the risk of a November cut, and fiscal uncertainty argue for fading strength once the BoE impulse fades, especially if global risk softens. Net-net, modest upside over the next few weeks, then a softer tone thereafter. This week’s jobs report is the swing factor: firm employment and wage momentum would validate the BoE’s caution and keep GBP supported, while any cooling would revive cut expectations and likely cap the bounce.

USD: September cut?

The US Dollar fell this week, weighed down by weaker economic data and growing political pressure on the Federal Reserve. The “sell America” theme, which began after the previous week’s poor NFP report, gained momentum as the DXY struggled to hold above 99.00. This narrative was reinforced on Tuesday when the ISM Services PMI came in unexpectedly weak, with the employment sub-index falling deeper into contraction. This fueled aggressive market pricing for a September rate cut. However, the main focus quickly turned to the Fed’s leadership after President Trump announced on Thursday that CEA Chair Miran would temporarily serve as a Governor. The move was widely seen as an attempt to push for immediate rate cuts and sent the dollar to a weekly low near its 200-day moving average at 98.18. The greenback stabilized into the weekend as Treasury yields moved higher following a week of weak auctions, ending a volatile period marked by markets repricing both economic weakness and a more politicized Fed.

President Trump’s announcement of Miran’s temporary appointment to replace Governor Kugler until January 2026 was the week’s most significant event. Markets interpreted it as the addition of a dovish voice to the Fed, aimed at pressuring for near-term rate cuts. Bloomberg also reported that Fed Governor Waller had emerged as the frontrunner to become the next Fed Chair. While Waller is seen as dovish, he is also considered more of an institutionalist compared to other candidates such as Kevin Hassett, which briefly tempered the rise in bond term premium. Several Fed officials echoed the dovish tone. San Francisco Fed’s Daly said she “can’t wait forever” to act and viewed two cuts in 2025 as appropriate, with risks tilted toward more. Minneapolis Fed’s Kashkari also supported the idea of two cuts this year and stated it would be “better to cut and then hike than sit on hands.” Markets maintained strong expectations for policy easing, with the probability of a 25bps September rate cut holding above 90% and total expected cuts for the year around 58–62bps.

On the data front, the July ISM Services PMI was the most influential release of the week, dropping to 50.1 against expectations of 51.5 and sitting just above contraction. The employment sub-index fell to 46.4, reinforcing the weak labor market picture from the NFP report. Prices Paid, however, rose to 69.9. Weekly jobless claims also rose slightly, with initial claims reaching 226k and continuing claims climbing to 1.974 million. In Canada, a surprise loss of 40.8k jobs compared to expectations for a gain helped the USD recover slightly against the CAD at the week’s end.

Geopolitically, President Trump issued broad tariff threats, including the possibility of raising India’s tariffs to 50%, a 35% tariff on the EU if investment targets were not met, and a 100% tariff on imported semiconductors. Reports also suggested a possible meeting between Trump, Putin, and Zelensky in the coming week, with a potential deal to secure Russian territorial gains briefly sending oil prices lower. By Friday, Japanese officials clarified that the US would not be stacking new tariffs on top of existing ones, removing a recent point of trade tension.

Market sentiment was shaped by the view that a slowing US economy would push the Fed toward easing, which weighed on the USD while boosting risk assets such as equities. Treasury yields helped stabilize the dollar toward the end of the week, rising on Thursday and Friday after poor auction results for 3-year, 10-year, and 30-year notes, as well as possible positioning ahead of next week’s CPI release.

As of Sunday, the markets assign an 88% probability to a 25‐bps rate cut and a 12% probability to holding rates steady by the Fed at its September 17th meeting. The interest rate path is identical compared to last week, and the markets are pricing in 79‐bps of rate cuts over the next five meetings.

In our view, the recent NFP report was bad enough to mark a clear shift in sentiment for the US Dollar. The headline NFP miss was bad enough on its own, but the large downward revisions to previous months made it even harder to ignore. To us, it looks like the labor market is losing momentum faster than the Fed anticipated.

Because of that, we now see a September rate cut as the most likely outcome. The Fed had been trying to hold a more cautious tone, especially after Powell’s comments earlier in the week pushing back against rate cuts. But the data doesn’t support that stance anymore, and rate cut expectations have flipped aggressively, and we’re now looking at nearly 60bps of easing priced in by the end of the year.

We don’t believe the US economy is falling off a cliff. Wage growth is still decent, and there’s no sign of a major demand shock. But with job creation slowing and the unemployment rate edging up, the Fed has enough justification to ease in September, especially with ongoing geopolitical risks and rising tariffs starting to bite.

That said, this week brings some major data releases, including Tuesday’s CPI report. A significantly higher CPI or a significantly lower CPI could shift our outlook.

We’re sticking to our bearish baseline bias from last week.

GBP/USD 4H

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