GBP/USD Policy Split Sets Stage for Key Central Bank Decisions

The GBP/USD currency pair has been trading in a narrow band of 1.3525 to 1.3565 since Monday, despite a recent policy split between the Federal Reserve and the Bank of England.

The Fed's target range is 3.50% to 3.75%, while the BoE holds Bank Rate at 3.75%, effectively closing the interest rate advantage the dollar used to have over sterling.

This structural change has made the pair a pure contest of which central bank moves next and in which direction, rather than relying on funding advantages or policy rates.

The market assigns a 62% to 64% probability to a Federal Reserve increase at the September 15-16 meeting, but if that hike lands and the BoE holds, the dollar reclaims a 25-basis-point edge and cable loses its principal support.