Fed Hikes rates for the first time in three years

The Federal Reserve raised its base rate by 0.25% today, its first hike in three years, after the 10-year US Treasury yield tipped over 5% and left policymakers little room to hold. Sterling is essentially flat against the dollar this morning, but that calm masks a bigger question the market is only starting to price: what happens when the Bank of England doesn't follow.

Why the Fed moved now

Even members who weren't convinced a hike was necessary found themselves boxed in. With yields ripping higher, holding rates steady would have signalled the Fed wasn't taking inflation seriously — a message markets would likely have punished with a sharper sell-off. Chairman Warsh's accompanying speech reinforced the point, restating the Fed's commitment to bringing inflation back to 2% "in a timely manner." US yields dropped in response, a sign investors believe the Fed is prepared to keep going if needed.

The Bank of England's harder problem

The Bank of England meets today, and markets are pricing in just a 6% chance of a matching hike — despite US inflation sitting only 0.3 percentage points above the UK's. Gilt yields have faced the same pressure as their US counterparts, arguably worse, and have only partially followed the global pullback that followed the Fed's decision. If the BoE holds while inflation expectations stay elevated, Governor Bailey will need unusually direct language to convince markets the Bank is still serious about its 2% target — otherwise gilts, and sterling with them, could come under renewed pressure.

What the pound is doing right now

Sterling's near-flat day against the dollar (+0.06%) doesn't yet reflect the divergence risk building underneath — GBP/USD is still down over 1% on the month. GBP/EUR has held up slightly better, edging positive both on the day and over the past month, while GBP/AUD's strong year-to-date move (+7.31%) reflects a very different story playing out in commodity currencies. The next few sessions, and Bailey's tone at today's meeting, are what will decide whether the pound's current calm holds.

What this means if you hold or move currency

Rate divergence between major central banks is one of the biggest drivers of short-term currency movement. A Fed that's willing to act and a BoE that holds steady is exactly the kind of gap that can widen quickly in GBP pricing. Whether that matters to you depends on what you're holding currency for — a business managing supplier payments in dollars, an individual sending money abroad, or a traveller planning ahead all sit on different sides of that risk.

This article is intended to inform, not to advise — it isn't a recommendation to buy, sell, or hold any currency, and rates can move quickly in either direction. If you want to understand what today's decisions mean for your specific exposure, your Caxton dealer can talk you through live pricing and the options available to you, or you can check current rates online.