GBP/USD Stuck in Neutral Ahead of Fed and BoE Decisions

The GBP/USD currency pair has been trading in a narrow range of 1.3525 to 1.3565 since Monday, with no clear direction.

This is despite the fact that markets expect a Federal Reserve interest rate hike at its September 15-16 meeting, with a 62% to 64% probability assigned to this outcome.

The Bank of England, on the other hand, has not yet confirmed whether it will raise rates at its September 17 meeting, leaving investors uncertain about the future direction of sterling.

The policy spread between the Fed and BoE has effectively closed, with both central banks having identical upper bound target ranges, eliminating the dollar's traditional interest rate advantage over sterling.

This change in dynamics means that the GBP/USD pair now trades on the basis of growth differentials and terms of trade rather than interest rates alone.

The Bank of England Governor Andrew Bailey acknowledged inflation risks were skewed higher due to the Middle East conflict, but refused to precommit to raising rates at the September meeting, cooling expectations for a hike.