British pound under pressure

17 September 2026

British Pound Under Pressure: Could the Bank of England Decision Open the Door for GBP/USD to Fall Below 1.3400 ?

Rania Gule, Senior Market Analyst at XS.com – MENA

In my view, GBP/USD is entering a highly sensitive phase, as its movements are no longer driven solely by the UK economy’s performance but are increasingly influenced by the divergence in monetary policy between the Bank of England and the Federal Reserve. The US dollar has received a fresh boost after the Federal Reserve raised interest rates by 25 basis points to a range of 3.75%-4.00%, while continuing to signal the possibility of another rate hike in 2026. In my assessment, these developments represent a clear headwind for the British pound, particularly if markets maintain their expectation that US interest rates will remain elevated for longer. Such a backdrop could leave any upside recovery in GBP/USD vulnerable to renewed selling pressure.

At the same time, I do not see the outlook for the British pound as entirely negative, as the Bank of England is facing a different inflation challenge that could force it to maintain a tighter monetary policy stance than previously expected. UK inflation rose to 3.1% in August from 2.9% in July, while core inflation remained relatively elevated, leaving the central bank facing a difficult balancing act between containing inflation and avoiding additional pressure on the domestic economy. For this reason, I believe the importance of the Bank of England meeting lies not only in the interest-rate decision itself. With the decision to keep rates at 3.75% potentially already largely priced into the market, investors are likely to focus more closely on the bank’s tone and its guidance on the inflation and interest-rate outlook over the coming months.

In my view, the most important scenario for the pound will depend on the voting pattern within the Monetary Policy Committee and on whether policymakers view the recent rise in inflation as a temporary energy-driven phenomenon or as a potential risk to domestic inflationary pressures. Expectations point to the Bank of England keeping interest rates at 3.75%, while the division seen at the previous meeting may persist between members favoring unchanged rates and those leaning toward a rate hike. If the Bank of England delivers a more hawkish message, the pound could receive temporary support as markets begin to price in a greater possibility of a future rate increase. However, I do not believe such support alone would be enough to reverse the broader strength of the US dollar unless expectations surrounding US monetary policy also change.

The factor I consider most important at this stage is the expected interest-rate differential, rather than the current rate differential alone. Even if the Bank of England leaves rates unchanged, continued signals from the Federal Reserve that another rate hike remains possible could enhance the dollar’s appeal from a yield perspective. The Fed’s latest projections indicate the possibility of another rate hike this year, while borrowing costs are expected to remain elevated longer than markets had previously anticipated. In my view, this could be one of the most influential factors driving GBP/USD, as financial markets tend to price in the expected path of interest rates well ahead of actual policy decisions.

As for UK inflation, I see it as a double-edged sword for the pound. On the one hand, inflation remaining above the Bank of England’s 2% target could reduce the likelihood of interest-rate cuts and increase the chances of monetary policy staying restrictive, which would be supportive of the currency. On the other hand, the data suggest that a significant portion of the recent increase was driven by transportation and fuel costs, while core inflation remained comparatively more stable. This means the Bank of England may not necessarily view the rise as sufficient evidence of persistent domestic inflation. In my assessment, if investors become convinced that UK inflation is largely the result of an external energy shock, its positive impact on the pound could remain limited.

I also see the US economy’s performance as another factor favoring the dollar. US retail sales in August came in strong, highlighting continued resilience in consumer demand while inflation concerns remain in focus. This environment gives the Federal Reserve greater room to keep interest rates elevated without having to move quickly toward monetary easing. As a result, I expect upcoming US economic data—particularly inflation, labor-market figures, and consumer spending—to remain key drivers for GBP/USD and, at times, could prove more influential than UK economic data.

From a technical perspective, the 1.3400 area represents a key psychological and technical level in the short term, particularly after GBP/USD declined toward 1.3378 based on the current price action. If the pair remains below 1.3400, selling pressure could intensify, triggering a deeper repricing move. Conversely, reclaiming this level and holding above it could ease the downside pressure and create room for a corrective rebound. In my view, it is more accurate to treat 1.3400 as a key technical zone rather than simply a single price level, as the pair’s ability to stabilize above or below this area will provide an important indication of how markets are assessing the monetary policy divergence between the UK and the US.

Overall, I see the British pound facing a complex equation at present: elevated UK inflation gives the Bank of England a reason to maintain a restrictive stance, while a resilient US economy and a Federal Reserve that appears increasingly inclined to keep interest rates higher provide continued support for the dollar. Therefore, my outlook leans toward continued volatility and downside pressure on GBP/USD in the short term, with 1.3400 remaining a key level for assessing the balance between buyers and sellers. However, I would not consider a move below this level to be definitive confirmation of a long-term bearish trend. A more hawkish Bank of England stance or a decline in expectations for further US rate hikes could quickly restore some balance. In my view, the decisive factor for GBP/USD will not be a single interest-rate decision, but rather the expected direction of the monetary policy divergence between the UK and the US—a factor that could determine whether the pound faces a deeper corrective decline or an opportunity to recover part of its recent losses.

 

Zaid Barem / ymm