Pound Sterling Declines as Fed Hike Bets and UK Inflation Weigh

The Pound Sterling (GBP) declined on Wednesday due to expectations of a near-certain Federal Reserve rate hike and firmer UK inflation data. The dollar gained support ahead of the Fed decision, with markets pricing in a 25 basis point hike to 4% later that day.

FX strategist Francesco Pesole from ING noted that 'any openness to further tightening can support the dollar by reinforcing policy credibility and countering any debasement trade risk premium'. Markets are also looking at Chair Kevin Warsh's press conference for cues on the dollar reaction, with a potential dovish risk if the new dot plot shows a median of 4.0% for both 2026 and 2027.

The UK's headline CPI accelerated to 3.1% in August from 2.9%, driven by a 7% monthly rise in fuel costs, but ING expects it to climb toward 3.4% next month and peak near 3.7% early next year. The Bank of England is seen holding rates into 2027 barring a sustained energy-price spike above the 4% inflation threshold.

The euro's resilience reflects a diverging dollar narrative rather than eurozone strength, with ING targeting a EUR/USD test of 1.150 as soon as this week, potentially triggered by Wednesday's Fed announcement.