Back in Control

The hawkish Fed hike strengthens the dollar's near-term position, while the BOE's cautious stance leaves sterling vulnerable despite slower quantitative tightening.

• The FOMC raised its target range by 25 basis points to 3.75%-4.00% after five meetings on hold, its first hike since July 2023.
• The Fed's 2026 projections moved toward market pricing for another 25-basis-point hike, with higher 2026 and 2027 GDP forecasts, lower unemployment projections, and PCE inflation reaching 2% only in 2029.
• The dollar's upside is supported by the United States' relative growth advantage, but tightening by other major central banks limits policy divergence and makes new cyclical highs less likely.
• The BOE kept Bank Rate at 3.75% for a sixth consecutive meeting by a 6-3 vote, while three policymakers supported a 25-basis-point hike and Governor Andrew Bailey warned that persistent Middle East conflict could force further tightening.
• The BOE will reduce its gilt holdings by an average of £46 billion annually through 2034, including £20 billion of sales, compared with an £87.5 billion average reduction and £32 billion of sales over the previous four years; markets nevertheless price roughly 100 basis points of hikes over the next twelve months.

Takeaway: The dollar remains favored in the near term because of the Fed's hawkish stance and US growth edge, but its upside is constrained by global tightening; BBH sees the BOE tightening less than markets expect, leaving GBP exposed to a dovish repricing while energy prices keep pressure on gilt yields.