Pound Hits Three-Month High Against Dollar as Traders Bet Fed Won't Hike Again This Year

The British pound is trading close to a three-month high against the U.S. dollar, sitting around 1.3544 to 1.3545 during Monday's Asian session, according to FXStreet. That's just below the multi-month peak touched the prior Friday.

The move is being driven almost entirely by the U.S. side of the equation. Traders have been slashing their bets on another Federal Reserve interest rate hike, with the probability of a September increase falling from 55% a week ago to 35%, according to Crypto Briefing.

Two data points did the damage. First, July's consumer price index rose just 0.1% month-over-month, according to Breitbart Business Digest, marking the second straight month of cooling headline inflation even though the year-over-year rate remains at an "uncomfortably high" 3.4%. Core CPI, which strips out food and energy, rose 0.2% for the month and is up 2.4% year-over-year, still above the Fed's 2% target but trending the right direction.

Second, U.S. retail sales fell 0.6% in July, the steepest monthly drop since May 2025, according to FXStreet. That's a real signal of consumer pullback, not just noise, and it gave traders another reason to bet the Fed stays put rather than tightens further.

The Fed's actual position: hawkish talk, no action

On July 29, the Federal Open Market Committee voted 9-3 to hold the federal funds rate in its 3.5% to 3.75% range, according to the Epoch Times. That's the fifth straight meeting without a change. Three regional Fed presidents, Cleveland's Beth Hammack, Minneapolis's Neel Kashkari, and Dallas's Lorie Logan, dissented in favor of a quarter-point hike, not a cut. That dissent matters. It shows a real hawkish faction still on the committee actively pushing for tighter policy, not looser.

New Fed Chairman Kevin Warsh, only in his second meeting leading the central bank, has walked a careful line. He told Congress the committee has "no tolerance for persistently elevated inflation" and called sticky inflation "a tax on the American people and businesses," according to the Daily Wire. But he's also declined to signal whether the Fed's next move is a hike, a hold, or a cut, describing the current stance as the Fed doing its "own homework" rather than a pause, according to the Epoch Times.

President Trump has weighed in too, telling reporters aboard Air Force One that Warsh wants to lower rates but is being blocked by his own board of governors, some of whom Trump described as having "perhaps bad intentions." Trump argued the economy could be running at "8%, 9%, 10%, 12% GDP" if rates were cut, according to the Daily Wire. That's a specific, attributable claim from the president, not something the Fed itself has confirmed. Trump's economic growth claims here are not consistent with mainstream forecasts and should be read as political rhetoric, not FOMC guidance.

Prediction markets aren't betting on a Trump-style dovish pivot. Kalshi, cited by the Daily Wire, showed the odds of a rate cut by the end of 2026 at just 4%, while the odds of a hike had risen to 70%. This diverges from the currency-market narrative of fading hike bets and reflects how unsettled the outlook remains depending on which market is being watched and when.

The UK side of the trade

The pound isn't just riding dollar weakness. The UK economy expanded 0.3% in June, putting Britain on pace for the strongest growth among G7 economies in the first half of 2026, according to FXStreet. Second-quarter growth did slow, from 0.6% to 0.4%, but that's still resilient enough to keep alive the case for a Bank of England rate hike sometime in 2026.

Analysts at MUFG/BTMU told FXStreet that sterling has been "the best performing major currency so far in August," crediting the UK economy's resilience to the energy-price shock triggered by the U.S.-Iran conflict. That geopolitical backdrop cuts both ways: oil-price volatility from the Middle East standoff is also the main thing keeping the dollar from falling further, since it feeds inflation risk that limits how dovish the Fed can credibly sound.

What's next

UK jobs data lands Tuesday, UK consumer inflation figures come Wednesday, and FOMC minutes are also due Wednesday, according to FXStreet. Any of the three could move GBP/USD sharply. If UK inflation runs hot, it strengthens the case for a BoE hike and could push the pound higher still. If the FOMC minutes show more committee members leaning toward tightening rather than holding, that alone could reverse the dollar's recent slide regardless of what July's CPI report showed.