Fed Rate Hike Strengthens Dollar as Bank of England Decision Puts Sterling in Focus

Key Highlight

• The Federal Reserve raised interest rates to 3.75% to 4.00%, as expected, but its latest projections were more hawkish than markets had anticipated. The updated dot plot points to further tightening, while markets are pricing around 75 basis points of additional hikes over the next year. December is currently the key meeting to watch.

• For sterling, attention now turns to the Bank of England. A hold is widely expected, with markets pricing only around a 10% chance of a hike. This means the Bank’s guidance and tone will be more important for the pound than the decision itself.

• The stronger dollar backdrop has pushed GBP/USD, EUR/USD and GBP/EUR to fresh multi week lows, while positioning in the options market has become more cautious towards both sterling and the euro against the dollar.

Market Recap

The Fed delivered its first-rate hike since 2023, raising rates by 25 basis points to 3.75% to 4.00% in a unanimous 12 to 0 decision.

The main market reaction came from the updated projections rather than the rate increase itself. Both the median interest rate forecast, and longer-term neutral rate moved higher, reinforcing expectations that US rates could remain elevated for longer.

UK rate expectations moved in the opposite direction. Softer than expected UK services CPI led markets to reduce expectations for further BoE tightening. The amount of rate increases priced over the next year fell to approximately 99 basis points, down from a peak of 125 basis points earlier in the week.

Meanwhile, UK 30-year gilt yields approached 6%, reaching their highest level since 1998. Elevated borrowing costs and domestic fiscal concerns continue to add another layer of pressure to sterling.

Market Overview

Pound vs Dollar

Sterling remains under pressure following the Fed’s more hawkish outlook. GBP/USD is trading below its key moving averages, while options markets continue to reflect expectations of further weakness over the coming weeks.

The BoE’s decision is therefore particularly important for the pound. A cautious message about the outlook for interest rates could add to sterling’s recent weakness, while any indication that further increases remain possible could provide support and prompt a recovery.

Over the medium term, the dollar’s interest rate advantage remains an important consideration. If US rates stay higher for longer, sterling could remain vulnerable, although any softening in Fed expectations could lead to a sharp reversal.

What could this means for you: A move towards resistance would make purchasing dollars approximately £425 cheaper per £250,000, while a move towards support would make the same purchase approximately £775 more expensive.

Euro vs Dollar

The euro has also weakened against the dollar following the Fed announcement and is currently below its major moving averages.

The more hawkish US interest rate outlook is the principal driver, with markets pricing around 75 basis points of additional Fed tightening over the next year. This creates a continued interest rate advantage for the dollar.

The euro could remain under pressure in the near term, particularly if further US economic data supports the case for higher rates. However, as the Fed gets closer to the end of its tightening cycle, the pace of dollar strength could eventually moderate.

What could this means for you: A move towards resistance would make purchasing dollars approximately $250 cheaper per €250,000, while a move towards support would make the same transaction approximately $600 more expensive.

Pound vs Euro

GBP/EUR is showing a less decisive picture than the two-dollar pairs. Recent momentum is relatively neutral, leaving the BoE decision as the main short-term catalyst for sterling against the euro.

A signal that further UK rate increases remain possible could support the pound, while a more cautious message could see sterling move back towards the lower end of its recent range.

Although sterling remains below its major moving averages against the euro, some of its recent weakness may already be reflected in current exchange rates. UK fiscal policy and elevated gilt yields remain important factors to monitor.

What this means for you: A move towards resistance would make purchasing euros approximately £475 cheaper per £250,000, while a move towards support would make the same purchase approximately £700 more expensive.

Bottom Line

The Fed’s 3.75% to 4.00% rate hike and more hawkish projections have strengthened the dollar backdrop, with all three major currency pairs moving to fresh multi-week lows.

For sterling, today’s Bank of England decision is the key event. With a rate hold already largely expected, the Bank’s language around future interest rates will be closely watched.

At the same time, UK 30-year gilt yields approaching 6%, ongoing fiscal concerns and the upcoming Budget mean sterling remains sensitive to changes in market confidence and interest rate expectations.

17th September  2026

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