British Pound softens as US Dollar gains despite easing Fed rate hike odds

• The British Pound weakened as the US Dollar gained momentum ahead of key ISM Services PMI data.
• Weak September Nonfarm Payrolls reduced expectations for an October Federal Reserve interest rate hike to 77.9%.
• Bank of England officials hinted at future rate hikes to counter persistent inflation driven by energy prices.

GBP/USD inches lower after posting modest gains in the previous day, trading around 1.3240 during Asian hours on Monday. The currency pair is under downward pressure as the US Dollar (USD) gains strength ahead of the upcoming US ISM Services Purchasing Managers Index release.

However, market participants have scaled back expectations for an upcoming Federal Reserve (Fed) interest rate hike, driven by recent softness in US employment data. Financial markets are now pricing in approximately a 77.9% probability that the Fed will leave benchmark rates unchanged at its October policy meeting, up from 74% prior to the jobs report.

The shift in market sentiment follows a surprisingly weak labor market performance, with US Nonfarm Payrolls (NFP) increasing by just 29,000 in September. This figure significantly missed consensus forecasts of 90,000 and represents a sharp deceleration from August’s downwardly revised gain of 133,000. Additionally, the US unemployment rate ticked up to 4.2%, even as the labor force participation rate expanded slightly to 61.8%.

On the United Kingdom (UK) side, investors are currently discounting roughly 30 basis points of rate hikes by the Bank of England (BoE) through the end of the year, alongside approximately 90 basis points of cumulative tightening through 2027. BoE policymakers, including Governor Andrew Bailey, have indicated a growing willingness to raise interest rates to combat inflation risks exacerbated by elevated energy prices.

Pound narrative underpinned as MUFG lifts UK growth outlook

Analysts at MUFG highlight that the UK growth backdrop has improved, noting that BoE staff have upgraded their expectations for the current quarter. In line with this, MUFG/BTMU report that they have “raised their forecast for growth in Q3 to 0.4% up from their previous projection of 0.1% set back in July,” reinforcing the view that resilient domestic activity could help support the Pound even as it trades near year-to-date lows against the Dollar.

Technical Analysis:

In the daily chart, GBP/USD trades around 1.3240, maintaining a bearish near-term tone as spot holds beneath both the nine-period Exponential Moving Averages (EMAs). The pair’s location below these key averages suggests rallies are likely to be capped, while the 14-day Relative Strength Index (RSI) near 35 hints at lingering downside pressure rather than a clean oversold condition.

On the topside, immediate resistance is clustered at the short-term nine-period EMA near 1.3259, with a more significant barrier at the 50-period EMA around 1.3399, which reinforces the broader bearish structure. With no clear technical support derived from the provided indicators, any further slide would leave traders watching for fresh horizontal floors from recent lows, while a daily close above 1.3259 would be the first sign that selling pressure is starting to ease.

Logan’s hawkish tilt lifts Fed expectations and supports the Dollar

Fed’s Logan speech scores 9.2/10 on the FXS Speechtracker, a clear hawkish surprise relative to the historical average of 8.1/10, with repeated emphasis that policy is not yet restrictive and must be “modestly tight.” The key remark that higher yields may reflect rising term premiums and thus reduce the need for additional tightening is overshadowed by explicit calls for at least 50 bps more in rate hikes and several moves to reverse last fall’s reductions, reinforcing a higher-for-longer rate narrative. Overall, the combination of stronger economic expansion, a well-balanced labor market, and a firm commitment to reviving price stability points to upside risks for the Dollar as markets price in more aggressive Fed action.

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