Pound Near Two-Week Low as Strong US Jobs Data Lifts Dollar

The British pound weakened toward $1.35, hovering near a two-week low, as stronger-than-expected US employment data boosted the dollar and reinforced expectations for tighter Federal Reserve policy. US nonfarm payrolls rose by 162,000 in August, well above expectations for a 56,000 gain, prompting markets to price in a near 60% probability of a Fed rate hike this month. In the UK, markets are now fully pricing in a BoE rate hike by year-end, with another increase expected by March 2027. Bank of England Chief Economist Huw Pill said on Thursday that raising interest rates now could reduce the risk of the central bank having to tighten policy more aggressively later to contain inflation. For the September meeting, however, policymakers are widely expected to leave rates unchanged as they adopt a wait-and-see approach, assessing the trajectory of the conflict in the Middle East and its impact on energy prices and inflation.

The British pound extended gains above $1.35 on Friday, rebounding from two-week lows as investors awaited fresh direction from US employment data due later in the day while continuing to digest signals from major central banks. Bank of England Chief Economist Huw Pill said on Thursday that raising interest rates now could reduce the risk of the central bank having to tighten policy more aggressively later to contain inflation, which has risen amid the fallout from the Iran war. Markets are now fully pricing in a BoE rate hike by year-end, with another increase expected by March 2027. Meanwhile, Federal Reserve Governor Christopher Waller said recent data showed signs of disinflation and that, if upcoming figures confirmed the trend, he would favor keeping interest rates unchanged at this month’s policy meeting. Markets responded swiftly, with futures pricing in roughly a 50% chance of a Fed rate hike this month, down from around 63% a day earlier.

The British pound stabilized around $1.35, pausing its recent selloff and hovering near a two-week low, as a sharp rally in the yen weighed on the US dollar and easing oil prices provided some relief. The yen strengthened on rising expectations of a Bank of Japan rate hike and the possibility of official intervention, prompting broad-based dollar weakness. Meanwhile, Brent crude retreated from six-week highs after US President Donald Trump said the renewed US military campaign in Iran would not last long. Sterling nevertheless remains under pressure from concerns over energy-driven inflation, higher interest rates and the UK’s fiscal outlook, despite Prime Minister Andy Burnham’s efforts to reassure markets of the government’s commitment to fiscal discipline. Markets are now fully pricing in a Bank of England rate hike by year-end, with another increase expected by March 2027.