US inflation has hit a three-year high, pushing the Federal Reserve toward rate hikes, while the Bank of England signals a prolonged pause. This divergence in monetary policy continues to exert downward pressure on the British pound.On June 11, the British pound once again came under selling pressure amid a widening divergence between the Federal Reserve and the Bank of England’s policy stances. Accelerating US inflation and increasingly hawkish rhetoric from the US central bank are creating a challenging fundamental backdrop for the pound in the near term.
US: Inflation Accelerates, Fed Tightens Its Stance
The US Consumer Price Index rose by 4.2% year-over-year in May—the highest reading since 2023. The primary driver was a 23.5% year-over-year surge in energy prices, fueled by escalating Middle East tensions and disruptions to key trade routes. The core index, which excludes food and energy, came in at 2.9% year-over-year, in line with expectations.
Traders are now pricing in a probability of over 70% that the Federal Reserve will raise interest rates at least once by the end of 2026—a sharp increase from roughly 14% just a month ago. Goldman Sachs has pushed back its forecast for the first rate cut to 2027. Rising real yields and a strengthening dollar are creating a clear headwind for the pound.
UK: Bank of England Maintains a Wait-and-See Stance
The Bank of England is pursuing a fundamentally different course. Governor Andrew Bailey has made it clear that the Bank is in no hurry to raise interest rates, while Monetary Policy Committee member Alan Taylor added that the current rate level is already exerting a restrictive effect on the economy, and he sees no need for further tightening.
Despite the fact that inflationary pressure driven by rising energy prices amid the Middle East crisis is also being felt in the UK, the Bank of England is reluctant to use rate hikes as its primary response tool. This stance widens the gap with the Federal Reserve and reinforces the structural case for further pound depreciation against the dollar.
What to Watch: Friday’s GDP Data — Key Risk Event
The next major test for sterling will be the UK GDP data due on Friday. A below-consensus reading could provide fresh momentum for pound sellers. During today’s session, the market is also awaiting the US Producer Price Index and weekly jobless claims—both releases have the potential to further cement expectations of a Federal Reserve rate hike and support the dollar.
Bottom Line: As long as the Federal Reserve leans toward tightening while the Bank of England firmly holds its pause, the policy divergence will continue to favor dollar strength against the pound. The release of UK GDP data on Friday remains the most critical risk event for the pair in the near term.
