Pound Weakens as Fed Rate Hike Odds Decline and BoE Tightening Expected

The British Pound weakened against the US Dollar in Asian trading on Monday, with the GBP/USD pair slipping to around 1.3240. This decline came as the Dollar strengthened ahead of the US ISM Services PMI data release. The Pound had seen modest gains earlier but failed to sustain momentum as investors focused on upcoming US economic indicators and their impact on monetary policy.

Market expectations for a Federal Reserve rate hike in October have decreased significantly following a weaker-than-expected US jobs report. The September Nonfarm Payrolls report showed only 29,000 new jobs, far below the projected 90,000. As a result, the probability of the Fed keeping rates unchanged in October has risen to 77.9%, up from 74% previously.

In contrast, the Bank of England (BoE) is seen as more likely to continue tightening monetary policy. Investors are pricing in around 30 basis points of additional rate hikes by the end of the year and roughly 90 basis points through 2027. BoE officials, including Governor Andrew Bailey, have emphasized the need to address persistent inflation risks, particularly from elevated energy prices.

Analysts at MUFG noted an improved UK growth outlook, upgrading their forecast for Q3 growth to 0.4% from a previous estimate of 0.1%. This brighter economic backdrop is seen as supportive for the Pound, despite its recent weakness against the Dollar. Technical analysis suggests GBP/USD remains in a bearish short-term bias, with key resistance levels at 1.3259 and 1.3399.

A hawkish speech by Federal Reserve official Logan added to Dollar strength. Logan's remarks, scored 9.2/10 on the FXS Speechtracker, emphasized the need for further rate hikes and reinforced expectations of a higher-for-longer policy stance. This has contributed to upside risks for the Dollar.