Pound slips as BoE holds the line

Market overview

FX markets head into the weekend with relative policy divergence firmly back in focus. The Fed’s rate hike and hawkish projections have lifted US front-end yields and reinforced the dollar’s carry advantage, but the greenback has struggled to fully capitalise on that repricing. Sterling and the yen have been the clearest underperformers after their respective central-bank meetings failed to deliver enough to satisfy hawkish expectations, while the euro has held up better on the crosses despite remaining under pressure against the dollar. Softer oil prices have offered some relief to European currencies, but with US rates still elevated and risk sentiment cautious, the broader FX picture remains tilted towards selective dollar strength rather than a clean breakout.

USD: Fed delivers, but dollar response remains measured

The Fed raised rates by 25bp unanimously on Wednesday and backed the move with a hawkish dot plot. Sixteen of 18 officials now expect at least one further hike this year, while the median end-2026 fed funds projection stands at 4.125%.

The initial dollar move was positive, with DXY gaining around 0.5% to a seven-week high, but the advance faded as two-year Treasury yields eased from Wednesday’s 4.74% peak to 4.69% on Thursday. The limited FX response relative to the scale of the front-end repricing remains notable.

Higher short-term yields continue to provide support, but markets appear reluctant to treat tighter Fed policy as a straightforward signal of stronger US growth. Instead, persistent inflation and fiscal concerns are tempering the dollar’s sensitivity to higher rates. That leaves some room for spot FX to catch up with the recent move in yields, although the upside remains constrained.

GBP: BoE caution takes the edge off sterling

The Bank of England left Bank Rate unchanged at 3.75%, with a 6-3 vote as three members favoured a hike.

The decision contained few major surprises. Policymakers are clearly more concerned about elevated energy costs, and the minutes suggest that a sustained rise in those pressures would strengthen the case for tighter policy. At the same time, the MPC continues to see reasons for patience, with limited evidence so far that energy-driven inflation is spreading materially through the wider CPI basket.

Restrictive financial conditions and a softer labour market are also helping to contain second-round effects. With markets entering the meeting heavily positioned for a hawkish outcome, the lack of a stronger signal prompted some profit-taking in sterling. GBP/USD slipped further below 1.34, while rate markets pared back some tightening expectations.

A November hike remains the central market view, with roughly an 80% probability priced, while just under three 25bp increases are discounted by April 2027.

EUR: Oil relief slows the decline

EUR/USD remains below 1.15 after the Fed’s hawkish message widened short-term rate differentials in favour of the dollar.

The ECB’s own firm policy stance continues to offer some support, but it has not been enough to offset the renewed US yield advantage. Lower oil prices have helped stabilise the pair by easing one of the euro area’s key external vulnerabilities, although the move looks more like a brake on further weakness than the start of a meaningful recovery.

The euro has performed better elsewhere, with EUR/GBP and EUR/JPY both higher. Those gains, however, reflect relative weakness in sterling and the yen more than a broad improvement in euro demand.

For EUR/USD, the near-term focus remains on whether softer energy prices and any pullback in US yields can prevent a test of 1.14.

JPY: BoJ fails to deliver a hawkish catalyst

The Bank of Japan raised rates as expected, but the decision offered little support to the yen. Two policymakers voted against the move, none argued for a larger increase, and the statement showed limited urgency around further tightening.

That has left the yen exposed to its ongoing yield disadvantage. USD/JPY is now more than 2% higher on the week, with the yen at a fresh two-week low and weaker against the major currencies.

With US short-end yields still elevated and the Fed signalling further tightening, the absence of a stronger BoJ response leaves the yen vulnerable unless Japanese policymakers become more explicit about the need for additional rate increases.

Looking ahead

• USD: Watch whether the dollar begins to catch up with the recent rise in US front-end yields.

• GBP: Energy prices and incoming inflation data will shape expectations for a possible November BoE hike.

• EUR: EUR/USD remains vulnerable below 1.15, with 1.14 the key downside level to monitor.

• JPY: Further weakness remains a risk unless the BoJ provides a clearer signal on the pace of future tightening.

• GBP/EUR: A quiet data calendar may keep the pair range-bound, although Autumn Budget headlines could increase volatility.