The Bank of England issued its interest rate decision on Thursday at the conclusion of its June 18 meeting, leaving rates unchanged at 3.75%, the lowest level since December 2022, in line with market expectations and marking the fourth consecutive meeting with no change.

This statement is positive for the British pound.

The US dollar climbed to its highest level in more than a year on Thursday after the Federal Reserve left interest rates unchanged while adopting a more hawkish tone, reinforcing investor expectations that additional rate hikes could be delivered in the coming months. Meanwhile, renewed weakness in the Japanese yen prompted fresh verbal warnings from Japanese officials.

Federal Reserve signals potential tightening

The Federal Reserve kept interest rates unchanged within the 3.50%-3.75% range, while new Chair Kevin Warsh began his tenure with a broad review of the central bank’s policy framework. Updated projections showed that nearly half of policymakers expect interest rates to rise this year as inflation concerns remain elevated.

Fed funds futures markets are now fully pricing in a rate hike by October, according to LSEG data, while stronger-than-expected US retail sales figures further reinforced hawkish expectations.

The euro fell 0.3% to $1.146, while the British pound dropped 0.54% to $1.322, leaving both currencies at their lowest levels in more than two months.

The US Dollar Index, which measures the greenback against a basket of major currencies including the yen, euro, and pound, rose 0.36% to 100.71, its highest level since May 2025.

The index had already surged 0.85% in the previous session, marking its biggest daily gain in more than three months.

“The hawkish update from the Federal Reserve raises the risk of a significant bullish breakout for the US dollar,” said Lee Hardman, Senior Currency Analyst at MUFG.

“The dollar has been supported by a sharp rise in short-term US interest rate expectations, more than offsetting the negative impact from the announcement of the US-Iran agreement over the weekend,” he added.

In energy markets, oil prices fell on Thursday after the United States and Iran signed a temporary agreement aimed at ending the conflict, reopening the Strait of Hormuz, and exempting Iranian oil exports from US sanctions, reducing some safe-haven demand for the dollar.

However, lower oil prices were not enough to halt the dollar’s advance as markets increasingly priced in further monetary tightening.

“Markets are currently assessing whether the Strait of Hormuz can truly be reopened to unrestricted shipping,” said Kimi Tong, Global Markets and FX Strategist at Everbright Securities International.

“Until that becomes certain, sentiment supporting dollar strength is likely to remain dominant, especially given the Federal Reserve’s increasingly hawkish stance,” she added.

Meanwhile, the Australian dollar, often viewed as a risk-sensitive currency, slipped 0.1%.

Japanese yen

The Japanese yen weakened to 160.90 per dollar, its lowest level since July 2024, erasing the gains recorded after Japanese authorities intervened in the foreign exchange market on April 30.

The renewed decline triggered another response from Japanese officials, who reiterated their readiness to support the currency if necessary.

“We are prepared to take appropriate action regarding currency market movements whenever needed,” Chief Cabinet Secretary Minoru Kihara told reporters on Thursday when asked about the yen’s weakness.

Elsewhere, attention is turning to the Bank of England, which is widely expected to leave interest rates unchanged at 3.75% at Thursday’s policy meeting while policymakers assess the impact of the temporary truce in the Iran conflict on the inflation outlook.

Gold prices rose nearly 2% in European trading on Thursday, resuming gains that had paused temporarily on Wednesday and moving back toward a two-week high, supported by a softer US dollar and falling oil prices after the United States and Iran signed the peace agreement electronically.

The Federal Reserve meeting, chaired by Kevin Warsh for the first time, came in more hawkish than markets had expected. Warsh warned that inflation risks remain persistent and reaffirmed the central bank’s commitment to returning inflation to target, strengthening expectations that restrictive monetary policy will remain in place for longer and raising the chances of at least one interest rate hike before the end of the year.

Price action

• Gold rose about 2.0% to $4,330.04 per ounce, up from an opening level of $4,256.71, after touching an intraday low of $4,254.67.

• At Wednesday’s close, gold lost 1.75%, marking its first decline in five sessions, after earlier reaching a two-week high of $4,382.83 per ounce.

• In addition to profit-taking, gold came under pressure after the hawkish Federal Reserve meeting led by Kevin Warsh.

US dollar

The US Dollar Index fell 0.2% on Thursday, retreating from a three-month high of 100.57 and reflecting renewed weakness in the greenback against a basket of global currencies.

Alongside profit-taking, the dollar weakened as risk appetite improved following the electronic signing of the preliminary peace agreement between the United States and Iran.

Oil prices

Oil prices fell more than 1.0% on Thursday, extending losses for a sixth consecutive session and hitting their lowest levels in three months, pressured by International Energy Agency forecasts pointing to a supply surplus next year following the US-Iran agreement.

The US-Iran agreement

• The US and Iranian presidents officially signed the preliminary peace agreement electronically.

• Pakistani Prime Minister Shehbaz Sharif said he was honored to announce the electronic signing of the historic “Islamabad Memorandum of Understanding” between the United States of America and the Islamic Republic of Iran.

• Sharif confirmed that the official signing ceremony for the agreement between the United States and Iran will take place in Switzerland on Friday.

• US and Iranian diplomatic and security delegations have begun arriving at the Bürgenstock resort in Switzerland to finalize the historic draft understanding ahead of its formal signing on Friday.

• Iran’s IRNA news agency published images showing Iranian President Pezeshkian signing the memorandum of understanding between Iran and the United States.

• The Islamic Republic of Iran announced that the historic agreement has effectively entered into force.

Federal Reserve

At the conclusion of its fourth monetary policy meeting this year, and in line with most expectations, the Federal Reserve left interest rates unchanged on Wednesday for the fourth consecutive meeting.

The Federal Open Market Committee voted unanimously, 12-0, to keep the benchmark federal funds rate within the 3.50%-3.75% range, its lowest level since September 2022.

Monetary policy statement

New Federal Reserve Chair Kevin Warsh made a major change to the policy statement by removing previous wording that had indicated a bias toward future interest rate cuts, giving the central bank a more cautious and restrictive stance.

The Fed changed its description of inflation in the official statement to “elevated,” compared with the previous wording of “somewhat elevated,” while reaffirming the Committee’s firm commitment to returning inflation to its 2% target over the medium term.

The FOMC also said it will continue monitoring the impact of incoming data on the economic outlook and remains prepared to adjust monetary policy at any time if risks emerge that could prevent it from achieving its goals.

Economic projections

The quarterly economic projections released by the Federal Reserve on Wednesday included several important revisions:

• Economic growth: The Fed lowered its forecast for US growth this year to 2.2% from 2.4%. It left its 2027 growth forecast unchanged at 2.3%, while raising its 2028 forecast to 2.2% from 2.1%.

• Headline inflation: The Fed raised its headline inflation forecast for this year to 3.6% from 2.7% in the March projections. It also lifted its 2027 forecast to 2.3% from 2.2%, while leaving the 2028 forecast unchanged at 2.0%.

• Core inflation: The Fed left its core inflation forecast for this year unchanged at 2.7%, in line with March projections. It also kept its 2027 and 2028 core inflation forecasts unchanged at 2.2% and 2.0%, respectively.

• Target interest rate: The Fed raised its target rate projection for this year to 3.75% from 3.50%, and lifted its 2027 projection to 3.50% from 3.25%. It kept the 2028 projection unchanged at 3.25%.

• Members removed all previous projections that had pointed to rate cuts this year, while 9 out of 18 participants now expect at least one interest rate hike before the end of 2026.

Kevin Warsh

New Federal Reserve Chair Kevin Warsh said in his first press conference that the central bank is fully prepared to use all of its monetary tools to ensure price stability, stressing that the fight against inflation is not yet over and that the US economy remains resilient enough to withstand the current restrictive policy stance.

Key comments from Warsh included:

• Inflation remains far above the 2% target due to the Iran war.

• I expect to propose changes, including revisions to the Summary of Economic Projections.

• Some changes are coming and may require press conferences.

• Financial market pricing is the most important source of information used by central bankers.

US interest rates

• Following the meeting, CME FedWatch data showed the probability of the Federal Reserve leaving rates unchanged in July falling to 72% from 91%, while the probability of a 25-basis-point rate hike rose to 28% from 9%.

• The probability of rates staying unchanged in December fell to 15% from 45%, while the probability of a 25-basis-point rate hike increased to 85% from 55%.

Gold outlook

Kelvin Wong, Asia-Pacific market analyst at OANDA, said the market rebound reflects a partial covering of short positions in gold following Wednesday’s sharp decline, adding that the positive news from the Middle East also contributed by pushing oil prices lower.

Wong added that he expects gold’s upside to remain limited, as market participants have reassessed the likelihood of the Federal Reserve beginning a new rate-hike cycle.

SPDR Gold Trust

Holdings of the SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, rose by 0.86 metric tons on Wednesday, bringing total holdings to 1,013.07 metric tons, rebounding from 1,012.21 metric tons, the lowest level since September 29, 2025.

The British pound rose in European trading on Thursday against a basket of major and minor currencies, attempting to recover from a two-month low against the US dollar. Sterling was supported by a softer dollar and lower oil prices following the electronic signing of the preliminary peace agreement between the United States and Iran.

Recent UK inflation data showed easing price pressures on policymakers, reinforcing expectations that the Bank of England will leave interest rates unchanged at today's meeting for a fourth consecutive time.

Price action

• GBP/USD today: The pound rose around 0.25% to $1.3320, up from an opening level of $1.3289, after touching an intraday low of $1.3285.

• Sterling lost 1.0% against the dollar on Wednesday, its biggest daily decline of the year, and fell to a two-month low of $1.3262 following the Federal Reserve’s hawkish policy meeting.

US dollar

The US Dollar Index fell 0.2% on Thursday, retreating from a three-month high of 100.57 points as the greenback weakened against a basket of global currencies.

Alongside profit-taking activity, the dollar came under pressure as risk appetite improved following the signing of the preliminary peace agreement between the United States and Iran.

Global oil prices

Oil prices fell more than 0.5% on Thursday, extending losses for a sixth consecutive session and remaining on track to hit fresh three-month lows. The decline followed International Energy Agency forecasts pointing to a supply surplus next year after the US-Iran agreement.

US-Iran agreement

• The US and Iranian presidents officially signed the preliminary peace agreement electronically.

• Pakistani Prime Minister Shehbaz Sharif said: “I am honored to announce today the electronic signing of the historic Islamabad Memorandum of Understanding between the United States of America and the Islamic Republic of Iran.”

• Sharif confirmed that the formal signing ceremony between the United States and Iran will take place in Switzerland on Friday.

• US and Iranian diplomatic and security delegations have begun arriving at the Bürgenstock resort in Switzerland to finalize the details of the historic agreement ahead of Friday’s official signing.

• Iran’s state news agency IRNA published photographs showing President Pezeshkian signing the memorandum of understanding between Iran and the United States.

• Iran announced that the historic agreement has officially entered into force.

UK interest rates

• UK inflation data released yesterday for May showed easing inflationary pressures on Bank of England policymakers.

• Money markets currently price the probability of a Bank of England rate hike at today’s meeting at 0%.

Bank of England

The Bank of England is set to conclude its policy meeting later today, with markets widely expecting policymakers to leave interest rates unchanged at 3.75%, the lowest level since December 2022, for a fourth straight meeting.

The interest rate decision, policy statement, and voting breakdown are due at 11:00 GMT.

Governor Andrew Bailey will hold a press conference at 11:30 GMT to discuss the outcome of the meeting, the inflation outlook, and the future path of UK interest rates.

Outlook for the pound

At Economies.com, we expect that if the Bank of England’s statement and Andrew Bailey’s comments prove more dovish than markets currently anticipate, expectations for multiple UK rate cuts in 2026 will increase, potentially placing additional downward pressure on the British pound.