File image of Kevin Warsh. Sérgio Garcia/Your Image for ECB. Copyright: European Central Bank 2026.
The British Pound could struggle to recover against the Dollar as investment bank analysts see further U.S. interest rate hikes ahead.
The Pound-to-Dollar exchange rate is exposed to further losses after the Federal Reserve raised interest rates and signalled more tightening lies ahead, with the Bank of England's decision at midday offering the next test.
The Fed raised the Federal Funds rate by 25 basis points to a range of 3.75% to 4.00% on Wednesday, its first hike since 2023, in a unanimous 12-0 vote.
The decision will "support a timelier return" to the 2% inflation target, says the Fed's statement.
The Fed's updated projections show 16 of 18 policymakers expect at least one more hike before year-end, with four pencilling in two.
PCE inflation is not expected to return to target until 2029.
Chair Kevin Warsh repeated his Jackson Hole message that financial conditions do not appear restrictive and inflation risks sit to the upside.
The Dollar rallied: the Pound-to-Dollar rate fell 0.7% on Wednesday to 1.3382, its lowest level in seven weeks.
The decline extends a retreat from the late-August high at 1.3676 and leaves the Pound 2.2% lower against the Dollar in under a month.
The two-year U.S. Treasury yield rose around 14 basis points to 4.74%, its highest since July 2024, while the 10-year yield moved above 5%.
"A hawkish Fed and elevated oil prices suggest that front-end US rates could remain biased higher and should therefore continue to offer support for the US dollar," says Lloyd Chan, Senior Currency Analyst at MUFG.
Above: GBP/USD at daily intervals, showing the break below 1.3506 and the decline from the August high.
The Dollar index gained 0.7% to recapture the 100 level.
"We believe the underlying inflation pulse in the US, coupled with outlook for more US Fed policy tightening, elevated oil prices (given the US' status as a 'net energy exporter'), and shaky risk sentiment should keep the USD supported over the near-term," says Peter Dragicevich, Currency Strategist at Corpay.
Money markets now price three additional Fed hikes over the coming year.
Barclays says the Fed's dot plot points to one more hike this year, a hold through 2027 and cuts of 25 basis points in both 2028 and 2029.
"We maintain our call for another 25bp hike in December," says Marc Giannoni, Chief U.S. Economist at Barclays.
Danske Bank goes further and expects hikes in both December and March.
"We think the macro case for further tightening remains solid," says Danske Bank in a research note.
The unanimous vote surprised Danske Bank, which had expected two or three members to back unchanged rates.
"We think the market reaction makes sense, even if Fed pricing is starting to look hawkish versus our baseline," it adds.
Swedbank now expects the next hike to arrive as soon as October.
"Historically, the Fed has rarely stopped after a single rate hike," says Glenn Nielsen, Economist at Swedbank.
Nielsen says much of the recent inflation pressure stems from energy, AI and tariffs, the effects of which should fade, and Swedbank still sees the Fed cutting rates late next year.
Fed funds futures price a roughly even chance of a hike in October and in December, according to XTB.
"The Fed rarely embarks on a one-off rate hike, and the evidence is not there for a one-and-done rate hike approach," says Kathleen Brooks, Research Director at XTB.
ING's James Knightley, Chief International Economist, says the Fed signalled a possible second hike before a long hold through 2027, a profile that sits below market pricing.
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"We see more labour slack than the Fed," he says.
Knightley adds that a resumption of energy flows from the Persian Gulf would favour a "one and done" outcome.
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Pantheon Macroeconomics says the median Fed official expects one more hike in the fourth quarter, but "the scope for downside surprises to their GDP and inflation forecasts is considerable," says Samuel Tombs, Chief U.S. Economist at Pantheon.
"With substantial tightening already priced, softer US data could reopen USD downside," says Christopher Wong, FX Strategist at OCBC.
The Pound-to-Dollar rate broke below support at 1.3439 following the Fed decision, according to Commonwealth Bank of Australia.
CBA says the Bank of England's announcement can push the pair below the next support at 1.3338.
Markets price around four Bank of England rate hikes by this time next year.
"We think this is too aggressive and expect the BoE to remain on hold for now," says Carol Kong, Economist and Currency Strategist at CBA.
"The risk, therefore, is that the Bank's communication disappoints market expectations, prompting some of the tightening currently priced to unwind," she adds.
A break of 1.3338 would expose 1.3302 and the early-August low at 1.3274.
The Bank Consensus, Without the Terminal
The median, mean, highest and lowest from the October survey update, plus named point forecasts out to 2027.
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