GBP/USD Rate Holds Firm Despite Sterling's Higher Interest Rates

The GBP/USD rate has held steady at just under 1.3550 after Monday's 42-pip move, despite the Pound Sterling carrying a higher policy rate and a larger tightening path over twelve months.

A strong American labor market raises the odds of another Federal Reserve hike, which means a stronger Dollar and a lower GBP/USD rate. The forward path also favors the Fed, with markets pricing in 71.9 basis points of Bank of England tightening against 59.5 from the Federal Reserve, and a terminal rate of 4.47% in London against 4.22% in Washington by mid-2027.

The inflation data does not support this ordering, however, with UK CPI inflation at 2.6% in June and expected to rise further as energy costs pass through, while the American annual rate is seen at 3.4%.

On Tuesday, the Bank of England's Monetary Policy Report hearings will take place, but these are unlikely to move the GBP/USD rate next week, with a hike priced in at 16% for September and the first move expected in November.