Sterling Rallied on BoE's Hawkish Vote, Then Gave It Back

BoE's hawkish 6-3 vote couldn't rescue the pound. Fed's pause sent the dollar lower, then a Tehran threat reversed course. Three central banks decide this week: BoE, Fed and BoJ. All eyes now on Eurozone inflation.

The BoE held rates unchanged at 3.75% more hawkish than anticipated, then spent the press conference walking it back. The Fed held at 3.50%-3.75%, pointed to higher real yields as evidence of tightening and declined to guide on September forward guidance. The EUR/USD pair moved the most, with the pair on course for its strongest weekly performance since April.

Sterling gained 0.7% on the dollar on Thursday after the BoE decision, its best session in weeks. On Friday it is pulling back from those highs as the dollar recovers. The EUR/GBP cross, up just 0.2% across the same Thursday session, told the fuller story of how much of that move belonged to the BoE and how much to the dollar.

A renewed Tehran threat reversed three sessions of dollar weakness overnight. Oil price volatility keeps inflation unresolved across all three economies.

Eurozone HICP publishes today. US Non-Farm Payrolls follow next Friday. Both carry the potential to reprice what this week's central bank decisions left open.

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GBP: BoE Vote Split Drives Temporary Sterling Rally

GBP/USD: 1.3462 | EUR/GBP: 0.8556

The GBP/USD pair surged as much as 130 pips from the European morning low just below 1.3350, pushing above 1.3450 and slicing through the converged 50-day and 200-day EMAs on the way. That advance, though, owed as much to suspected Japanese intervention knocking the dollar lower as it did to the BoE itself. By Friday's early European session, the pair pulled back to around 1.3445 as Middle East tensions reasserted safe-haven demand for the dollar.

The BoE held the Bank Rate at 3.75% for a fifth consecutive meeting, but the vote split landed more aggressively than anticipated. Three MPC members voted for an immediate 25 basis point increase: Catherine Mann, Megan Greene, and Chief Economist Huw Pill, shifting the tally to 6-3. Consensus had placed the split at 7-2.

Governor Bailey then spent an hour at the press conference pretty much walking the surprise back. He told reporters directly that nothing in the committee's statement should be interpreted as the Bank edging toward a hike. The majority framework held firm: tolerate a slower return to the 2% target rather than tighten into an external shock, and wait for hard evidence that energy costs are feeding domestic wage and price setting. June CPI printed at 2.6%, signalling inflation trends softer than feared, and that gave six committee members the cover to hold. One dissenter's stated trigger was narrower: the collapse of last month's peace framework and the energy volatility that followed.

The EUR/GBP cross confirmed the reading. Sterling gained roughly 0.71% on the dollar but only 0.2% on the euro across the same session. That 0.2% arrived late, well after the vote, and the pair sat softer against the euro through both the decision and the press conference. A genuine repricing of UK rate expectations would have bought considerably more than 20 pips.

Underlying that arises the fiscal question the BoE cannot answer yet. Prime Minister Andy Burnham took office on 20 July, appointed John Healey to the Treasury, and opened with language about finding flexibility within the inherited fiscal rules. Gilt yields answered immediately: the 10-year rose above 5%, the 30-year to near 5.75%, levels that sit among the highest in the G7. With approximately £24 billion in trailed spending and tax measures due ahead of an October Budget, elevated UK yields are currently read as a risk premium rather than rate attraction. That fiscal uncertainty is the ceiling on sterling's upside until October clarifies the picture. The GBP/USD pair is likely to act as a dollar instrument until the BoE meets again in September.

Key Technical levels for the GBP/USD pair: Resistance sits at 1.3515, 1.3570 and Support sits at 1.3400, 1.3350

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EUR: Euro Holds Firm as Growth Supports ECB Outlook

EUR/USD: 1.1518| EUR/GBP: 0.8556

The EUR/USD pair held firmly above 1.1500 on Friday, on course for a 1.3% weekly advance: its strongest performance since April. The pair weakened slightly in early Asian trade to around 1.1515 as renewed Middle East threats pressured sentiment, but buyers returned to the 1.1500 level. Earlier in the week, the pair traded choppily above 1.1400 in the immediate aftermath of the Fed's hold, before European data shifted the narrative decisively in the euro's favour.

Preliminary inflation data from Germany and France added to the ECB rate case. German HICP accelerated to 2.8% YoY in July, up from 2.4% in June. French CPI came in at 2.4% YoY, well above the 2.1% forecast, with a 0.6% monthly rise reversing almost entirely the 0.3% contraction from June. July's preliminary Eurozone HICP reading, due today, is expected to tick up to 2.9% YoY, with core inflation holding at a steady 2.8%. Both readings sit well above the ECB's 2% target.

That inflation backdrop arrived alongside Eurozone GDP growth of 0.4% QoQ and 1.0% YoY in Q2, beating market expectations of 0.2% and 0.5% respectively. Growth and inflation moving in the same direction at the same time, with a central bank that has already flagged a September hike, is a cleaner policy signal than the Fed managed this week.

The contrast is direct. The ECB provided unified guidance on a September hike. Fed Chair Warsh at the Fed held rates in the 3.50%-3.75% range but declined to signal the next move explicitly. His comments celebrating higher real yields and "more direct" market-driven tightening were read by investors as suggesting the Fed may lean on market forces rather than rate moves: reducing conviction in further hikes. Market expectations around September Fed hike probability fell to 63.4% post-meeting, down from 77% before. That policy divergence gave the euro a comparative advantage this week.

Analysis suggests that a sustained move above 1.1600 would require a further repricing of US rate expectations lower and an easing of Middle East tensions. The 1.1500 level has attracted buyers repeatedly, but the durability of further upside past 1.1600 is not settled.

The euro's strength in the current environment connects to a specific driver: the ECB's clearer rate guidance relative to the Fed's ambiguous stance. Investors have been watching the EUR/USD pair consolidate near multi-week highs in a context shaped by diverging central bank signals and live geopolitical risk. The Friday HICP release introduced the potential for further movement. Investors have been factoring in the gap between ECB clarity and Fed uncertainty as a live variable in rate assessment.

Key Technical levels for the EUR/GBP pair: Resistance sits at 0.8585, 0.8620 and Support sits at 0.8555, 0.8525

Key Technical levels for the EUR/USD pair: Resistance sits at 1.1600, 1.1650 and Support sits at 1.1450, 1.1500

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USD: Dollar Recovers as Fed Debate and Risk Flows Collide

DXY: 100.23

The dollar lost ground over three consecutive sessions after the Fed held rates unchanged at 3.50%-3.75% on Wednesday. The US Dollar Index (DXY) slid to a fresh six-week low at 99.85 before recovering back above 100.00 in early Friday trade, near 100.23. A renewed Tehran threat, with an official stating the US would "pay the price" for killing Iranian civilians, provided the catalyst for the reversal, lifting safe-haven demand for the dollar in Asian and early European trade.

The Fed's communication created as much uncertainty as it resolved. Policymakers held rates and expressed concern about upside inflation risks. Fed Chair Warsh then described higher real yields and more direct market signals as doing some of the tightening work, a comment markets read as the Fed outsourcing monetary restraint to market forces rather than delivering additional rate moves. Three FOMC members dissented in favour of an immediate 25 basis point increase: Beth Hammack of the Cleveland Fed, Neel Kashkari of Minneapolis, and Lorie Logan of Dallas.

Supporting the hold: US PCE fell 0.1% month-on-month in June, its first monthly decline since April 2020, as a temporary truce in the US-Iran conflict sent fuel prices lower. That removed some immediate pressure on the Fed to act. But oil price volatility linked to the unresolved Middle East standoff keeps the inflation question open.

The net effect: September hike probability fell from 77% to 63.4% as measured by the CME FedWatch tool. The dollar weakened on the interpretation that the Fed had signalled less urgency on rate moves, then recovered in part as geopolitical risk pushed safe-haven flows back in. The DXY's technical picture has deteriorated: a double-top pattern breakdown backed further downside risk toward 99.00 if the 100.00 level fails to hold.

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Current Rate Table

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Market lookahead:

Fri, July 31

• Eurozone Core Harmonized Index of Consumer Prices (HICP) Inflation figures (Jul)

Mon, Aug 03

• German Retail Sales
• Manufacturing PMI releases USD, GBP , EUR (Global Manufacturing PMI)

Tues, Aug 04

• US Goods Trade Balance
• US JOLTS Job Openings (Jun)

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