GBP Slips as Hawkish Fed Comments Meet Rising Middle East Tensions

The British Pound (GBP) has softened to near 1.3550 against the US Dollar (USD) amid rising geopolitical tensions in the Middle East and hawkish remarks from Federal Reserve Chairman Kevin Warsh at the Jackson Hole symposium.

The tensions were sparked by a threat from US President Donald Trump on Monday to forcefully strike Iran after the two countries exchanged fire for the first time in a month. This has led to safe-haven flows supporting the Greenback, making it a headwind for the GBP/USD pair.

Fed Chairman Warsh warned that inflation is not slowing significantly and that unless policymakers become confident of this, the central bank still has 'work to do.' As a result, traders have increased their bets on a September rate hike following Warsh's speech. However, a weaker-than-expected outcome from the US ISM Manufacturing Purchasing Managers Index (PMI) report later on Tuesday could drag the USD lower in the near term.

Market expectations remain firmly tilted toward further Bank of England tightening, with investors assigning a ~60% chance of a 25bpt rate hike at the next BoE meeting on September 16. The October 28 budget will be a key focus for markets over the next couple of months, as fiscal signals are now seen as integral to the UK policy outlook.