On Tuesday (July 28) during the Asian session, the British pound traded in a narrow range against the US dollar, currently hovering around 1.3290. The market has priced in a near 38% probability of a Federal Reserve rate hike this week, a level unusually high as the meeting approaches. Meanwhile, falling oil prices have pulled down the yield on 10-year UK government bonds to around 4.97%, easing short-term inflation concerns and slightly cooling market expectations for further rate hikes by the Bank of England, further pressuring the pound.

Markets are highly uncertain ahead of the Fed decision

According to the CME FedWatch tool, the market has priced in a 25 basis point rate hike in July at nearly 38%, a level of uncertainty extremely rare so close to the FOMC meeting. Citadel Securities expects the Fed to raise rates to bolster Chairman Warsh's credibility in combating inflation—he has repeatedly pledged to restore price stability. Looking further ahead, the probability of at least a 25 basis point rate hike in September is currently around 81.4%. The dollar's resilience is also reflected in its "selective pricing" of geopolitical news. Despite Trump's statement that the US and Iran are engaged in "good dialogue" to resolve the Middle East conflict—Washington suspended its 13-night airstrikes over the weekend, with no attacks reported for three consecutive days—the Iranian Foreign Ministry countered that it has not held direct negotiations with the US, but is only maintaining dialogue with Oman regarding the future of the Strait of Hormuz. While diplomatic progress has pushed oil prices down, the difference in US and Iranian positions means that geopolitical risks have not completely dissipated, and the dollar remains strong, supported by safe-haven demand.

Falling oil prices eased inflation concerns, and the yield on 10-year UK government bonds dropped to 4.97%.

The pound faces challenges from multiple fronts. Crude oil prices retreated from two-month highs, pushing the yield on 10-year UK government bonds down to around 4.97%. Easing inflation concerns led money markets to slightly lower their expectations for further interest rate hikes by the Bank of England. The tightening premium previously priced in due to rising energy costs is being gradually removed, weakening interest rate support for the pound. Investors' focus is now shifting to Thursday's Bank of England policy decision. The market widely expects policymakers to keep interest rates unchanged at 3.75%—an expectation supported by recent economic data: annual consumer price growth slowed to 2.6% in June, a 15-month low and below the Bank of England's own forecast.

The battle between bulls and bears in the British pound

The recent focus of the foreign exchange market has been on three major events: the Federal Reserve (FOMC) decision, the Bank of England's policy moves, and the progress of US-Iran diplomatic relations. If the FOMC unexpectedly announces an interest rate hike, it will strengthen the dollar's interest rate advantage, attracting funds back to US assets and pushing the dollar higher, thus putting significant pressure on the pound sterling, potentially accelerating the decline of the pound against the dollar. Meanwhile, if the Bank of England releases hawkish signals in its decision, such as hinting at further interest rate hikes this year, it is expected to boost market expectations for the pound's interest rates, providing temporary support and partially offsetting the pressure from the dollar's appreciation. Furthermore, if the US-Iran diplomatic negotiations ultimately break down, geopolitical risks will escalate rapidly, and increased risk aversion will lead to a return of funds to the dollar, a traditional safe-haven currency, further consolidating the dollar's strength. In summary, these three factors are intertwined, and the short-term trends of the dollar and the pound sterling will be highly dependent on the actual outcomes of policy and geopolitical events.

The British pound struggles to survive ahead of two major central bank decisions.

The pound is in a vulnerable position against the dollar ahead of the FOMC and Bank of England decisions. The dollar is supported by the highly uncertain policy outlook of the Federal Reserve – the market has priced in a near 38% probability of a July rate hike and a staggering 81% for a September hike, leaving the pound with little room to breathe. In the UK, falling oil prices have eased inflation concerns, lower bond yields have weakened interest rate support for the pound, and the widely expected Bank of England to hold rates steady further limits the pound's upside potential. In the short term, the pound is likely to consolidate within the 1.3250-1.3350 range. The Fed and Bank of England decisions will be key variables in breaking this deadlock. If the Fed is more hawkish than expected, the pound could fall below 1.3250; if the Bank of England releases unexpectedly hawkish signals, the pound could rebound above 1.3350. Until then, any directional bets are likely to face two-way risks. (GBP/USD daily chart, source: FX678) At 10:46 Beijing time on July 28, GBP/USD was trading at 1.3292/93.