During the Asian trading session on Friday (August 28), the British pound traded in a narrow range against the US dollar, hovering near 1.3590 and nearly flat on the day. The recent decline in Brent crude oil prices has eased UK inflation concerns, prompting the market to push back expectations for the next Bank of England rate hike from late 2026 to early 2027.

LSEG data reveals that financial markets are pricing in only about 24 basis points of tightening before December, with a cumulative 36 basis points expected by February 2027. The implied probability of a rate move at the September meeting stands at less than 4 basis points, translating to roughly a 15% chance of a hike. Most economists anticipate that the official rate will remain at 3.75% through the end of the year.

The pullback in oil prices has effectively alleviated concerns over UK inflation, driving traders to delay their expectations for the next rate increase. Despite July's inflation reading rising to 2.9% due to higher energy bills, and market projections pointing to further upside before year-end, the persistently weak labor market is keeping the Bank of England highly cautious. Scotiabank notes that the recent UK data calendar is largely quiet, and the policy signals from central bank officials are equally limited, with modest tightening expectations continuing to soften.

In the absence of strong domestic drivers, the pound is moving more in tandem with external risk sentiment and US dollar dynamics in the short term. Both upside and downside potential appear relatively constrained, with the market awaiting more decisive data or policy guidance.

The market is highly focused on Friday's Jackson Hole symposium, where Federal Reserve Chair Kevin Warsh is scheduled to deliver a keynote speech, as investors seek fresh signals on US interest rate policy. Scotiabank analysis points out that while historical experience suggests Jackson Hole "can have a significant impact on market pricing," the current risk expectations reflected in the options market are notably insufficient. One-week implied volatility is well below its recent average, indicating that traders may be overly complacent about Warsh's remarks and their potential implications.

Even though the dollar has shown slight strength ahead of the event, the market has not fully priced in possible policy surprises. If Warsh strikes a hawkish tone, the dollar could strengthen further, putting downward pressure on the pound. Conversely, if his language is dovish or focuses on longer-term structural issues, it could help stabilize risk assets and support the pound in the short term. The contrast between low volatility pricing in the options market and the historical influence of such events serves as a warning for investors to remain vigilant about potential sharp swings following the speech.

Overall, Jackson Hole is set to be the key variable driving the pound and the dollar in the near term.

Institutional Outlook

Bank of America has adopted a "decline first, rebound later" stance on GBP/USD in its latest forecast. The bank targets 1.32 for the third quarter, with a recovery to 1.37 by the end of 2026, followed by a rise to 1.45 by the end of 2027 and further to 1.47 in 2028. Near-term caution is mainly attributed to the dollar's continued support from US growth resilience and hawkish Fed expectations, as well as the lack of clarity in UK policy. Bank of America believes the pound holds relative appeal but prefers to wait for a clearer UK policy path before actively positioning. The bank also notes that pound volatility is relatively inexpensive and could benefit from election-related or policy uncertainties.

JPMorgan holds a modestly bearish view on GBP/USD, forecasting levels around 1.31 in September, 1.28 in December, and near 1.30 by March 2027. The primary drivers are rising UK political uncertainty—related to Labour Party leadership issues—and the potential for insufficient fiscal plan details to re-inflate the political risk premium. Investor positioning is already net short, indicating that the market has partially priced in depreciation expectations. JPMorgan expects the pound to remain around 0.88-0.89 against the euro and to trade in a 1.31-1.34 range against the dollar, reflecting a gradual weakening trend. If US exceptionalism persists and the Fed remains relatively hawkish, the pound's upside potential will be further limited.

Summary

Falling oil prices have eased inflation concerns, pushing market expectations for a Bank of England rate hike to early 2027, with only a 15% probability of a move at the September meeting. Most economists expect the rate to remain at 3.75% through year-end. Scotiabank highlights that both UK data and central bank signals are limited. The market's focus is now on Warsh's speech at Jackson Hole, with Scotiabank warning that options markets suggest investors may be underestimating the speech's potential impact. In the short term, the pound is likely to oscillate within the 1.3550-1.3650 range, awaiting fresh direction from Jackson Hole.

(Daily chart of GBP/USD, source: Easy-Forex)

At 10:58 Beijing time, GBP/USD was quoted at 1.3591/92.