The British pound edged lower against the US dollar during Asian trading on Friday, settling near 1.3450 after a three-day rally, cooling off from a fresh high of 1.3476 on Thursday, the strongest since July 21.

A hawkish hold by the Federal Reserve and internal divisions within the FOMC provided support for the greenback. Strategists at HSBC noted that the Fed "held rates steady for the fifth consecutive time, as expected," but the "9-3 vote revealed a fierce debate within the FOMC over the appropriate policy path." However, downside risks for the pound may be limited, as diplomatic progress between the US and Iran boosted risk appetite, and a surprise hawkish dissenting vote in the Bank of England's 6-3 decision offered underlying support for sterling.

Fed Divisions Prop Up the Dollar; 9-3 Vote Exposes Policy Battle

The Federal Reserve kept interest rates unchanged for the fifth straight meeting, but the 9-3 vote highlighted intense internal disagreements over the proper policy course. Three hawkish members—Cleveland Fed President Hammack, Minneapolis Fed President Kashkari, and Dallas Fed President Logan—voted for a 25-basis-point rate hike. HSBC strategists emphasized that this outcome "underscores the extent of internal divisions." Fed Chair Warsh stated at the press conference that the committee is "firmly committed to achieving price stability" and will "act without hesitation," providing medium-term support for the US dollar.

US-Iran Diplomatic Progress Boosts Risk Appetite, Challenging Dollar's Safe-Haven Appeal

The pound may find support from potential headwinds facing the greenback. Positive developments in US-Iran diplomacy have lifted global risk appetite, weakening the dollar's safe-haven demand. Talks between the two nations are advancing, aiming to restore stability in the Strait of Hormuz. Meanwhile, President Trump announced a historic deal to secure the disarmament of Hamas and an Israeli withdrawal from Gaza, with a senior Hamas official confirming the agreement. Easing tensions in the Middle East are eroding the dollar's safe-haven appeal.

Bank of England's Surprise Vote

The Bank of England's latest decision delivered a mild surprise, with policymakers voting 6-3 to hold rates steady, as Mann joined Greene and Pill in the rate-hike camp. TD Securities noted that "this was not the consensus view," although "many forecasters, including ourselves, had flagged this as a risk." However, TD Securities stressed that "beyond the vote tally, the rest of the committee still appears quite comfortable with maintaining rates, given the lack of clear second-round effects in inflation data." This assessment suggests that, despite the hawkish dissent, the BOE's overall policy stance remains tilted toward inaction.

The Fed-BOE Policy Tug-of-War

The current trajectory of the pound against the dollar is driven by multiple key variables. If expectations for a Fed rate hike in September continue to firm, the dollar would gain significant support. A reassessment of the US interest rate path would enhance the dollar's yield advantage, attracting capital flows into US Treasuries and dollar assets, thereby putting pressure on sterling and limiting its upside.

The BOE's subsequent policy signals are equally crucial. If officials deliver hawkish statements, emphasizing inflation stickiness or hinting at keeping rates higher for longer, the pound would gain clear support. Hawkish signals would help cement expectations of a UK interest rate advantage, drawing cross-border capital inflows and offsetting some of the pressure from a stronger dollar, providing the pound with short-term rebound momentum.

Progress in US-Iran diplomacy acts as a key variable in the safe-haven space. If negotiations yield substantive breakthroughs, global geopolitical risk premiums would drop, further reducing demand for the dollar as a safe haven. A rise in risk appetite would drive capital flows toward risk-sensitive currencies like the pound, which, combined with potential hawkish signals from the BOE, could jointly support the pound's strength against the dollar.

Pound Searches for Balance Between Dollar Strength and Underlying Support

The pound has pulled back from its three-day rally to around 1.3450, buoyed by the Fed's internal divisions. The Fed's 9-3 vote and Warsh's tough stance provide medium-term support for the dollar, but improving risk appetite from US-Iran diplomatic progress is eroding the greenback's safe-haven appeal. The BOE's 6-3 vote revealed a hawkish dissent, but TD Securities noted that other committee members remain "quite comfortable" with holding rates. In the near term, the pound is likely to consolidate in a 1.3400-1.3500 range. If the Fed continues to price in a September rate hike and US-Iran talks break down, the pound could retest the 1.3400 support level. Conversely, if diplomatic breakthroughs occur and the BOE delivers hawkish signals, sterling may break above the 1.3500 resistance. The medium-term direction for the pound hinges on the relative strength of the BOE and Fed policy paths, as well as the evolution of geopolitical risks.