The British pound continued its upward trajectory against the US dollar during early Asian trading on Tuesday, July 7th, aiming for a ninth consecutive day of gains and currently trading around 1.3390.

The primary driver for the dollar's weakness is a significant cooling in market expectations for Federal Reserve interest rate hikes in July and September. This shift stems from a cooler employment report, combined with falling crude oil prices spurred by OPEC+ production increases and progress toward a US-Iran peace deal, collectively easing inflationary pressures.

However, hawkish commentary from Fed Governor Christopher Waller and resilient ISM services data have provided a floor of support for the US dollar.

Concurrently, the pound faces its own headwinds. Market expectations for Bank of England rate hikes this year have plummeted from two to just one, with a probability of only 70%.

Core Narrative for Dollar Weakness: Cooling Jobs and Plunging Oil Form a 'Disinflationary Combo'

The fundamental force behind the pound's nine-day rally is a market repricing of the Federal Reserve's policy path. In recent weeks, traders had priced in consecutive rate hikes for July and September, but a confluence of data and events is eroding that outlook.

The first crack appeared in the labor market. The latest non-farm payrolls report showed job additions for April, May, and June all fell short of Wall Street expectations. While this moderation in job growth is far from alarming, it has sown enough doubt to question the inflation pressure driven by an overheated labor market. Within the Fed's data-dependent framework, this marginal softening directly reduces the necessity for aggressive tightening.

The second variable is oil prices. Decisions by OPEC+ to increase output, coupled with advancements in US-Iran peace talks, have led to a notable recent decline in crude prices. The drop in energy costs not only directly lowers headline inflation figures but also transmits through channels like transportation and raw material costs to broader sectors, alleviating the "inflation spiral" pressures that had most concerned the Fed. This supply-side disinflationary effect gives the Fed greater room to maneuver in its inflation fight.

The combined impact has led to a significant adjustment in Fed rate hike expectations. The US Dollar Index has faced downward pressure in recent trading, providing the macro backdrop supporting the pound's sustained advance.

The Significance of Waller's Remarks: Hawkish Stance Intact, but 'Flexible Forward Guidance' Holds Clues

Although the dollar is broadly under pressure, it is not in full retreat. Comments from Fed Governor Christopher Waller on Monday provided baseline support for the greenback, and the signals he conveyed warrant careful analysis.

Waller's core argument focused on the double-edged nature of forward guidance. He acknowledged it as a "valuable tool" that can accelerate policy transmission, but also stressed it can become a policy straitjacket when overly rigid or when facing multiple plausible economic paths. This rhetoric essentially paves the way for more flexible policy communication, subtly correcting what may be an oversimplified market expectation.

His insistence on the credibility of the 2% inflation commitment, rejection of financing deficits with low rates, and preference for an inflation target range (without changing the current target) are all rhetorically hawkish. The key, however, is that he made no explicit comments on the near-term policy path. This "principled but non-committal" stance aligns with the communication paradigm advocated by ECB President Christine Lagarde and Chief Economist Philip Lane at the Sintra Forum—suggesting major central banks are synchronizing a shift towards a "framework guidance" model. For the dollar, this implies limited downside but a need for further data confirmation for any meaningful upside catalyst.

ISM Services Data: Prices Cool but Employment Rebounds, Economic Resilience Persists

Another layer of support for the dollar comes from real economic data. The June ISM Services PMI came in at 54.0, exactly matching market expectations and remaining in expansionary territory (above the 50 threshold).

The sub-indices revealed a mixed picture. The Prices Index fell sharply from 71.3 to 67.7, confirming that falling oil prices are transmitting to service sector costs—a positive signal for the inflation outlook. However, the Employment Index rebounded significantly from 47.9 (contraction) to 51.2, re-entering expansion. This improvement contrasts somewhat with the moderate slowdown seen in the employment report, suggesting labor demand in the services sector remains resilient.

For the dollar, the overall takeaway from this report is "neutral to stable." There was no negative surprise to shock markets, nor an upside surprise to rekindle inflation fears. With services being the largest sector of the US economy, its continued expansion provides a reason for the Fed not to rush into easing. The dollar's lack of further significant decline post-report is based on this logic.

The Pound's Hidden Worry: BoE Hike Expectations Shrink from 'Two' to 'One with 70% Probability'

The sustainability of the pound's consecutive gains is questionable without support from its own fundamentals. Current policy dynamics in the UK provide a cautionary signal.

The scale of adjustment in market expectations for Bank of England policy is striking. Just weeks ago, investors were pricing in two 25-basis-point hikes this year. Now, expectations have shrunk dramatically to just one hike with only a 70% probability. This contraction is far greater than the adjustment for Fed expectations, indicating the pound's rise is more a "passive push" from dollar weakness than an "active strengthening" based on its own merits.

BoE Governor Andrew Bailey recently confirmed that inflation remains on track to return to the 2% target, but acknowledged it will take longer than previously forecast and explicitly ruled out near-term rate cuts. While this stance leans hawkish, its force is limited—it's more about "ruling out cuts" than "confirming hikes."

The June 18th BoE Monetary Policy Committee meeting provided a more nuanced internal view. Officials voted 7-2 to hold the Bank Rate at 3.75%. Despite the hold, the hawkish camp doubled compared to April, with two dissenting members advocating for an immediate hike to 4.00%. This widening internal divergence shows a growing inclination towards hiking at the BoE, but one that hasn't yet reached a tipping point.

Current UK inflation stands at 2.8%, but internal BoE projections suggest it could rebound above 3% in the autumn due to delayed pass-through of wartime energy costs. This expectation has led major sell-side institutions to forecast the next hike may not come until around the end of 2026. In essence, the BoE's policy path is in a "wait-and-see" phase—awaiting the full manifestation of energy cost pass-through and wage data to confirm whether second-round effects exist.

Outlook: Assessing the Rally's Substance and Key Next Variables

The potential for a nine-day winning streak for GBP/USD is uncommon in recent G10 currency movements. However, the length of a rally does not equate to its strength. The current price increase reflects a market retreat from Fed hike expectations more than a reassessment of BoE hike prospects. Should US economic data show resilience, a corrective dollar rebound could quickly erode the pound's gains.

US CPI data is the primary variable. If core inflation cools as expected, the probability of a September Fed hike will decline further, keeping dollar pressure intact and potentially allowing the pound's advance to continue. If core inflation proves unexpectedly stubborn, Waller's hawkish arguments will be repriced by markets, risking an end to the pound's nine-day streak.

UK wage and services inflation data are equally crucial. If they indicate second-round effects are forming, the market's 70% probability for one BoE hike this year could move toward 100%, giving the pound an endogenous driver and freeing it from a purely passive reliance on dollar weakness.

Subsequent oil price movements will provide either macro resonance or a counter-disturbance. If the decline in oil prices driven by OPEC+ increases and geopolitical de-escalation persists, it will simultaneously support dollar weakness and risk appetite, creating resonant support for the pound. However, if renewed Middle East tensions drive an oil price rebound, inflation expectations would tilt back toward the Fed, undermining the logic behind the pound's passive rise. The direction and combination of these three key variables will determine whether the nine-day rally is the start of a trend or the final move before an overbought correction.

Overall, nine consecutive days of gains objectively indicate a short-term overbought condition, but the inertia of a trend should not be ignored. With both the Fed and the BoE operating in a "data-dependent, path-open" framework guidance mode, a data surprise from either side could trigger significant repricing in the exchange rate. For traders, the current focus should not be the short-term question of "when will the nine-day streak end?" but rather the core contradiction: "Have the policy path differentials between the two central banks been fully priced in?"