Sterling Holds Above $1.34 as Fed Hike Risk Firms Dollar

The British Pound continues to hold above the $1.34 level against the US dollar, with the greenback's strength primarily driven by persistent expectations of potential Federal Reserve (Fed) interest rate hikes. Hawkish signals regarding the Fed's monetary policy are contributing to the dollar's appreciation against major currencies in global markets.

In recent sessions, some US labor market data briefly put pressure on the dollar. The latest JOLTS report indicated a larger-than-expected decline in job openings, which initially fueled speculation that the Fed might have less need for further rate increases. However, the broader picture of a resilient US economy and ongoing inflationary pressures keeps alive the possibility of the Fed implementing further rate hikes later in the year. This underpins the upward trend in the US Dollar Index (DXY). Meanwhile, Sterling has maintained a more cautious stance following the Bank of England's (BoE) decision last week to keep its Bank Rate unchanged at 3.75%. Although the BoE's 6-3 vote to hold rates was seen as more hawkish than the anticipated 7-2 split, Governor Andrew Bailey emphasized that the disinflationary process remains on track.

The GBP/USD pair has shown resilience by staying above the $1.34 mark in recent sessions. However, the US dollar's firmness, supported by expectations of a potential Fed rate hike, is exerting some pressure on Sterling. The Bank of England's commentary, which led markets to pare back expectations for BoE rate hikes in 2026, has contributed to Sterling's underperformance compared to some other G10 currencies. Specifically, a rebound in US Treasury yields has also lent support to the dollar, limiting significant upside for the Sterling/Dollar pair.

Geopolitical developments in the Middle East, particularly diplomatic efforts to reopen the Strait of Hormuz, are influencing market sentiment. Hopes for a resolution could temporarily reduce safe-haven demand for the dollar, potentially easing some of its upward momentum. Nevertheless, the impact of rising energy prices on global inflationary pressures reinforces the likelihood of the Fed maintaining a restrictive monetary policy stance. This scenario continues to support expectations for the dollar to remain strong over the longer term.

Analysts suggest that the near-term direction for the GBP/USD pair will largely be determined by upcoming US inflation data and statements from the Federal Reserve. Strong economic indicators, such as robust US services PMI data, could reignite expectations for further Fed rate hikes and provide additional support to the dollar. Overall, the market broadly anticipates a high probability of another Fed rate hike this year, solidifying forecasts for the dollar to retain its strength in the coming months.