GBP/USD edged lower after two consecutive sessions of gains, trading around 1.3470 during Asian hours on Tuesday. Despite the recent pullback, the downside appears limited as the Pound Sterling (GBP) may find support from market expectations that the Bank of England (BoE) will maintain a cautious policy stance in light of persistent inflationary pressures and a cooling labor market.
BoE’s cautious outlook supports the Pound
At its August policy meeting, the BoE projected that inflation would peak around 4% in September. However, Deputy Governor Clare Lombardelli and Monetary Policy Committee (MPC) member Catherine Mann warned last week that the latest inflationary shocks should not be dismissed as temporary. Their remarks reinforced expectations that the central bank will remain vigilant in its efforts to anchor inflation expectations, even as economic growth slows.
US Dollar strength limits GBP recovery
The Pound’s weakness was exacerbated by renewed strength in the US Dollar (USD), which extended its gains following hawkish comments from Kansas City Fed President Jeffrey Schmid. Schmid emphasized that inflation remains too high and that the Federal Reserve (Fed) must uphold its credibility, adding that monetary policy is currently well-calibrated.
However, the USD’s upward momentum may be limited as markets continue to price in further Fed rate cuts and remain wary of the ongoing US government shutdown. According to the CME FedWatch Tool, investors are assigning a 94% probability to a Fed rate cut in October and an 84% chance of another reduction in December.
Political gridlock adds to USD uncertainty
The White House moved to clarify US President Donald Trump’s earlier comments that federal workers were already being laid off due to the shutdown, stating that no layoffs had yet occurred but warning that job losses could materialize if the standoff persists. The government shutdown entered its seventh day as the Republican-led Senate once again rejected competing spending measures aimed at restoring federal agency funding, Reuters reported.
