On Friday (July 31) during Asian trading hours, the pound sterling retreated slightly against the dollar after three consecutive days of gains, trading around 1.3450. The pair had previously risen to 1.3476 the previous day, a new high since July 21. The Fed's hawkish stance and internal FOMC disagreements provided support for the dollar – HSBC strategists noted that the Fed "held rates unchanged for the fifth consecutive time, in line with expectations," but "the 9-3 vote revealed a fierce debate within the FOMC regarding the appropriate policy path." However, the downside for the pound may be limited: progress in US-Iran diplomacy boosted risk appetite, coupled with an unexpected hawkish dissenting vote in the Bank of England's 6-3 vote, providing potential support for the pound.

Internal divisions within the Federal Reserve supported the dollar; the 9-3 vote revealed a debate over policy path.

The Federal Reserve kept interest rates unchanged for the fifth consecutive time, but the 9-3 vote revealed a fierce debate within the FOMC regarding the appropriate policy path. Three hawkish members—Cleveland Fed President Hammark, Minneapolis Fed President Kashkari, and Dallas Fed President Logan—voted in favor of a 25-basis-point rate hike. HSBC strategists emphasized that the vote "highlights the extent of internal divisions." Fed Chairman Warsh stated at the press conference that the committee is "firmly committed to price stability" and will "not hesitate to act," providing medium-term support for the dollar.

Diplomatic progress between the US and Iran boosts risk appetite, posing a challenge to the safe-haven demand for the US dollar.

The pound may find support due to potential challenges facing the dollar – positive diplomatic progress between the US and Iran has boosted global risk appetite, reducing demand for the safe-haven asset. US-Iran negotiations are progressing, aiming to restore stability in the Strait of Hormuz. Meanwhile, Trump announced a historic agreement aimed at Hamas disarmament and Israeli withdrawal from Gaza, which has been confirmed by senior Hamas officials. These signs of de-escalation in Middle East tensions are diminishing the dollar's safe-haven appeal.

Bank of England's unexpected vote

The Bank of England's latest decision brought a mild surprise—the central bank voted 6-3 to keep interest rates unchanged, with Manning joining Green and Pierre in their call for a rate hike. TD Securities noted that "this was not the market consensus," although "many forecasters, including ourselves, had considered this a risk." However, TD Securities emphasized that "besides the voting result, the other members of the committee seemed quite happy to keep rates unchanged, given the lack of clear signs of a second-round effect in inflation data." This assessment suggests that despite hawkish dissent, the Bank of England's overall policy stance remains inclined to hold rates steady.

The policy game between the Federal Reserve and the Bank of England

The current exchange rate movement of the British pound against the US dollar remains driven by multiple key variables. If expectations of a Federal Reserve rate hike continue to strengthen, the dollar will receive significant support. A market reassessment of the US interest rate path will enhance the dollar's interest rate advantage, attracting funds back to US Treasuries and dollar assets, thus putting temporary downward pressure on the pound and limiting its upside potential. Subsequent policy signals from the Bank of England are equally important. If officials release hawkish statements, emphasizing sticky inflation or hinting at maintaining high interest rates for a longer period, the pound will receive significant support. Hawkish signals will help solidify market expectations of the UK's interest rate advantage, attracting cross-border capital inflows, offsetting some of the pressure from a stronger dollar, and providing momentum for a temporary rebound in the pound. Progress in US-Iran diplomacy constitutes a key variable in terms of safe-haven assets. If negotiations achieve a substantial breakthrough, global geopolitical risk premiums will decline, further weakening the demand for the dollar as a safe-haven currency. A recovery in risk appetite will drive funds to risk-sensitive currencies such as the pound, which, combined with potential hawkish signals from the Bank of England, is expected to jointly support a stronger pound against the dollar.

The pound is finding a balance between a stronger dollar and potential support.

The pound fell back from a three-day rally to around 1.3450 against the dollar, supported by internal divisions within the Federal Reserve. The Fed's 9-3 vote and Warsh's hawkish remarks provided medium-term support for the dollar, but improved risk appetite driven by progress in US-Iran diplomacy is weakening the dollar's safe-haven appeal. While the Bank of England's 6-3 vote included hawkish dissenting voices, TD Securities noted that other members of the committee remained "very happy" to keep interest rates unchanged. In the short term, the pound is likely to consolidate within the 1.3400-1.3500 range. If the Fed continues to price in a September rate hike and US-Iran negotiations break down, the pound may test the 1.3400 support level; if there is a breakthrough in US-Iran diplomacy and the Bank of England releases hawkish signals, the pound is expected to break through the 1.3500 resistance level. The medium-term direction of the pound still depends on the relative strength of the policy paths of the Bank of England and the Fed, as well as the evolution of geopolitical risks. (GBP/USD daily chart, source: FX678) At 13:10 Beijing time on July 31, GBP/USD was trading at 1.3447/48.