British Pound advances on hawkish BoE outlook and muted US Dollar

• Forecasts of BoE rate rises underpin the British Pound as hawkish policy expectations strengthen.
• The US Dollar comes under heavy pressure as Middle East tensions ease and demand for safe havens recedes.
• Robust US GDP and labour market figures contain USD declines even as the likelihood of a Fed rate rise diminishes.

At around 1.3400 in Friday’s Asian session, GBP/USD is advancing for a third successive day. Supporting the pair is a stronger British Pound (GBP), with hawkish expectations building ahead of next week’s Bank of England (BoE) policy decision.

A 25-basis-point increase in November, followed by a further rise in February, is what traders expect from the BoE. Separately, UK Finance Minister John Healey outlined measures to tackle elevated energy prices and announced plans to increase rates on banks, gambling, savers, landlords and online shopping.

Reduced demand for safe havens is also supporting GBP/USD by putting pressure on the US Dollar (USD), as hopes grow for US-led diplomatic peace talks. With tensions in the Middle East subsiding, concerns over oil supplies and inflation have been partly offset, weakening expectations of a Federal Reserve rate increase at its December meeting. The probability traders assign to a 25-basis-point rise now stands at nearly 75%, compared with 84.2% a day earlier.

US economic releases nevertheless continue to point to resilience, despite the recent pressures on the Dollar. Supported by robust consumer spending growth of 3.8% YoY, preliminary Gross Domestic Product came in at 3.4% YoY, above the 3.2% forecast and up from 2.2% in Q2. Meanwhile, the Core PCE Price Index, the Fed’s preferred inflation measure, increased by 3.1% YoY as expected. A slight decline in initial jobless claims to 194K provided further evidence of a heating economy and a tight labour market.

Dollar bulls retain support as Warsh reaffirms price stability commitment

Repeated and unequivocal pledges to achieve 2% PCE price stability reinforce the firmly hawkish tone of Warsh’s press conference, where the FXS Speechtracker score of 7/10 is in line with the historical average. His insistence that “ensuring price stability is not about a fixed date on a calendar” and that “new monetary medicine” is working points to a data-dependent yet determinedly anti-inflationary approach that supports the Dollar. That message is accompanied by his comfort with inflation expectations and tightening financial conditions. In discussing widening credit spreads, the effects of higher rates on technology and AI, and broadening capital expenditure, Warsh suggests confidence that policy is taking effect without yet endangering the expansion. This leaves the Fed inclined to retain restrictive policy settings.

After a jump of +14.39 points, the FXS Fed Sentiment Index reached 141.89, placing it firmly in hawkish territory and substantially above the neutral threshold of 100. The move accords with the strong anti-inflation message recorded by the FXS Speechtracker. At this elevated level, the index underlines that markets should read Warsh’s comments as reinforcing the prospect of rates staying higher for longer, a setting that typically favours the Dollar against the Euro and Yen.