GBP/USD Slumps as Interest Rate Gap Widens Between Fed and BoE

The British pound has fallen to its weakest level in three months against the US dollar. The pair currently trades at 1.3236, down 2.64% over the past month from a high of 1.3607.

This decline is partly due to the interest rate gap between the Federal Reserve and the Bank of England. While the Fed has already hiked its target range to 3.75%-4.00%, the BoE held rates at 3.75% in September but signaled growing support for tightening.

The three-month low is a result of sterling's inability to benefit from a hawkish Bank of England and instead being dragged down by a faster Federal Reserve. The Fed's next meeting is scheduled for October 28, while the BoE's next meeting won't be until November 5, leaving sterling exposed to a widening differential for at least five weeks.

The market has priced in BoE tightening, but not fast enough, with traders expecting at least 41 basis points of hikes by year-end. However, the Fed is expected to reach 4.00%-4.25% by October, giving the dollar an advantage and putting pressure on sterling.