US Dollar: Hawkish Fed Pours Cold Water On Rate Cuts

The US dollar and Pound Sterling edged higher after both the Federal Reserve and Bank of England delivered hawkish holds, reinforcing expectations that interest rates will stay elevated for longer.

Fed and BoE Deliver Hawkish Holds

The Fed kept rates on hold, but three members made it clear they were leaning hawkish and against cuts.

The BoE meeting also kept rates on hold, but the 8-1 vote included one notable vote for a hike.

There is concern of secondary inflation effects from the oil spike. This could force the bank to hike later this year.

Chair Powell’s last Fed meeting was relatively hawkish and gave the new Chair, Warsh, a warning that cuts won’t come easily.

The vote was 8-4 in favour of keeping rates steady, with Stephen Miran again voting for a 25bp rate cut, but with three others registering a hawkish view that, “did not support inclusion of an easing bias in the statement at this time”.

It’s not completely clear why the vote was 8-4 instead of 11-1, as the three members still effectively voted to pause, but it seems members wanted to underline inflation concerns and the fact that they are in no way considering cuts.

The dollar was slightly higher on Wednesday following the meeting, but faded again on Thursday as a resurgent Yen pushed USDJPY down –2%.

BoE Deliver a Hawkish Hold

The Bank of England’s April meeting was focused on the massive energy-driven inflation shock.

The Monetary Policy Committee voted 8–1 to maintain the Bank Rate at 3.75%, a decision that aligns with market expectations but reveals a growing internal tension.

While the majority of the committee chose to wait for clearer data on the US-Iran war’s economic fallout, Chief Economist Huw Pill broke rank to vote for a 25-basis-point hike to 4%.

This 8–1 split is a significant shift from the unanimous “hold” seen in March and suggests that the policy is far from clear as the closure of the Strait of Hormuz pushes global oil prices toward a four-year high.

While there was a hawkish tilt, rate hikes are far from certain as the bank’s projections show a “stagflationary” backdrop with high inflation but weak growth.

Inflation in the United Kingdom climbed to 3.3% in March, up from 3% in February, driven primarily by a sharp jump in fuel prices.

At the same time, the Bank slashed its growth forecasts for 2026 to just 0.8%, down from a previous estimate of 1.3%.

This mirrors the “heavy toll” seen in the Eurozone, where high energy costs are simultaneously fanning inflation and curtailing growth.

The report highlights that while the labor market shows some “resilience,” (the last employment report showed slight improvement), the risk of second-round effects—where high energy costs lead to higher wage demands—is now the primary threat to the Bank’s 2% target.

Governor Andrew Bailey struck a defensive tone in his press conference, explaining that while the Bank had been on a path to reach its inflation target by May, the war has fundamentally changed the outlook.

He stated that holding rates today was “the most appropriate thing to do” given the high degree of uncertainty, but he signaled that they may need to rise if disruption to energy supplies persists. Bailey explicitly warned that the “faster there is a resolution to this situation… the easier and better the outcome will be.”

His caution was echoed by Chancellor Rachel Reeves, who noted that her hopes for a cost-of-living recovery have been “blown off course by the crisis in the Middle East.”

The immediate reaction was muted. In the currency markets, the British Pound gained slightly as the 8–1 split suggested a “hawkish hold.”

EURGBP slid to 0.865, while GBPUSD was 0.35% higher, primarily due to a weaker dollar.