GBP/USD Remains Below January High Despite Narrowed Rate Advantage

The Pound Sterling's rate advantage over the US Dollar has narrowed significantly, but it still carries a higher policy rate and a larger tightening path over twelve months. However, GBP/USD remains roughly 330 pips beneath its January high despite this.

On Monday, the pair covered 42 pips with American desks shut for Labor Day, but Tuesday is expected to be more eventful. The Bank of England meets on September 17 and a hike is priced at 16%, while the first move the market genuinely expects is November, at 56%.

The last thing to move this pair was Friday's US Nonfarm Payrolls (NFP), which printed 162K against a 53K consensus. This led to a strong American labour market and a potential for the Federal Reserve to tighten again, making a stronger Dollar more likely, and subsequently a lower GBP/USD.

The UK inflation data does not obviously support this ordering, with UK CPI inflation at 2.6% in June, while the US annual rate is seen at 3.4%. Despite this, London has the lower inflation, higher policy rate, and larger path priced against it, but GBP/USD remains below its January high.

The Monetary Policy Report hearings begin on Tuesday, where four Monetary Policy Committee (MPC) members will appear before the Treasury Committee to discuss July's report and the decision to hold Bank Rate. This hearing could potentially change November pricing, which is more significant than any other event this week.