On Friday, GBP/USD retreated to around 1.3380, down 0.39% on the day, following a strong rally after the Bank of England (BoE) decision on Thursday [1]. The BoE kept its rate unchanged at 3.75%, as expected, but surprised markets with a unanimous 9-0 vote, contrasting with expectations of a 7-2 split and the previous 5-4 decision, signaling a more hawkish stance [1]. Governor Andrew Bailey emphasized readiness to act if inflation persists, and the MPC sharply revised its third-quarter inflation forecast higher to about 3.5% from 2%, mainly due to rising energy prices linked to the Middle East war [1]. Members such as Catherine Mann and Swati Dhingra indicated openness to prolonged holds or even rate hikes [1].
Meanwhile, the US Federal Reserve held rates at 3.50%-3.75% and still projects one rate cut this year, but Chair Jerome Powell highlighted elevated uncertainty due to the Iran conflict. The Fed's dot plot showed more officials no longer expecting rate cuts this year, supporting the US Dollar [1]. The US Dollar Index (DXY) rebounded toward 99.50 on Friday after a daily low near 99.00 on Thursday, with CME FedWatch tool showing a 71.8% chance of a hold by year-end [1].
Brown Brothers Harriman (BBH) noted that recent political comments, including Israeli Prime Minister Benjamin Netanyahu's statement that the war will end sooner than expected and energy infrastructure will no longer be targeted, briefly steadied risk sentiment. However, renewed risk aversion has lifted the Dollar, crude oil, and bond yields while pressuring equities [2]. BBH highlighted that rate differentials keep DXY in a 96.00–100.00 range, but energy-shock-related stress skews USD risks higher, especially as dollar funding needs rise during financial market stress [2].
Analysts from MUFG and ING commented that the sharp repricing of UK rate expectations has led to a notable rise in yields, supporting GBP, but warned that the move may be overdone and that further escalation in Middle East tensions could weigh on equities and reduce support for GBP [1]. ING believes the market's aggressive repricing toward further BoE tightening is likely excessive, with oil price dynamics remaining a key driver for GBP/USD [1].
The British Pound was the strongest against the Japanese Yen today, with a 0.65% gain, but lost ground against the US Dollar [1].
CONCLUSION
The GBP/USD pair is under pressure as both the BoE's hawkish surprise and persistent US Dollar strength driven by energy shock and risk aversion shape market dynamics. Analysts caution that aggressive rate repricing may be overdone and that further geopolitical tensions could weigh on risk assets. Overall, the market impact is high, with both currencies responding to shifting monetary policy and global risk sentiment.