Sterling steadies ahead of BoE call

The pound briefly spiked beyond 1.37 dollars after the Fed decision before slipping back below 1.36 as investors turned to today’s Bank of England meeting. GBP/EUR remains range-bound near 1.15 to 1.16, reflecting balanced expectations for both central banks. Without a clear catalyst from policy or data, that band looks likely to hold.

The post-Fed price action in cable had the feel of a “buy the rumour, sell the fact” trade, amplified by Powell’s remarks. Nevertheless, policy divergence is still a support: the Fed has started to ease while the BoE remains cautious. A retest of the summer peak at 1.3787 is possible later this year, although a pullback towards 1.35 remains plausible in the short term.

The BoE is widely expected to leave Bank Rate at 4% and moderate the pace of quantitative tightening. A September cut was never likely, and recent figures have not shifted that view. Market pricing implies just a 2% chance of a move, with an expected 8–1 vote, Alan Taylor seen as the only advocate for a reduction.

Further easing is likely but will be gradual. The August minutes showed a close call and an emphasis on inflation risks. Wage growth has slowed, but services inflation remains high, and food and fuel prices risk embedding expectations. The approach to gilt sales may draw the most market focus. The MPC is expected to trim next year’s target to about £75bn, from £100bn, and may concentrate sales in shorter maturities to avoid adding stress to the long end of the curve.

Dollar rebounds after Powell tempers easing hopes

The US dollar reversed sharply after the Federal Reserve’s press conference, erasing early losses and pulling EUR/USD down by more than a cent from 1.1919 to around 1.181. The meeting initially looked dovish, with a 25bp cut and a softer tone in the policy statement and projections. Yet Chair Powell struck a firmer note in the Q&A, stressing that “there was not widespread support at all for a 50bp cut” and framing the move as “risk management.” His comments marked a shift towards caution, highlighting divisions within the Committee and the challenges of balancing the Fed’s dual mandate.

The Summary of Economic Projections reflected that balancing act. Officials still expect another half-point of easing by year-end and a further quarter-point in 2026, slightly above June’s path, but inflation is seen remaining stubborn, with core PCE forecast at 3.1% through 2025. Growth estimates were revised higher to 1.6% for 2025 and 1.8% for 2026, signalling more resilience even as job indicators soften.

Powell sidestepped questions about political pressure and the role of Governor Stephen Miran, saying only that decisions will depend on incoming data. His insistence that the Fed is “not on a pre-set course” helped anchor expectations for a slower, data-led easing cycle.

Markets moved swiftly. Ten-year Treasury yields, which had fallen after the statement, rebounded during the press conference, while the DXY recovered from its lows. Traders still price two more cuts this year, but the tone from Powell lowered the odds of a faster pace, forcing a recalibration across rates and FX.

Euro consolidates after muted Fed impact

EUR/USD touched a fresh 2025 high at 1.1878 on Tuesday as investors positioned for Fed easing, but the pair ended flat after Powell’s remarks lifted the dollar. With nearly three cuts priced by year-end, the bar for further dollar downside was high. The Fed’s message, though dovish, leaned towards caution and left room for a slower pace, tempering immediate pressure on the greenback.

The euro remains supported above 1.18, with that level now a key floor rather than resistance. The ECB’s stance is firmer than it was in July, when expectations of a Fed shift briefly pushed EUR/USD higher without durable follow-through. For now, the pair is likely to hover around current levels, with any deterioration in euro sentiment — such as setbacks in trade talks — threatening to nudge it back below 1.18.