The pound gained ground on Monday (19 September), as investors grew increasingly confident the US Federal Reserve will not raise interest rates later this week.

Having ended last week recording its worst performance over a seven-day period in over a month, sterling was on the front foot by mid-afternoon on Monday, gaining against both of its major rivals. The UK currency was 0.39% higher against the dollar, exchanging hands at $1.3044, and rose 0.32% against the euro, fetching €1.1687.

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The greenback had rallied on Friday on the back of strong inflation figures but relinquished the gains, as investors looked to have all but ruled out an interest rates hike this month.

"The market implied probability of a hike on Wednesday remains very low at 12% while December has risen to 55%," said Oanda's senior market analyst Craig Erlam.

"This does not mean the Fed will not raise interest rates on Wednesday of course, but it does suggest the chances are slim as the Fed will not want to unnecessarily rock the boat and has clearly not done a good job of preparing the markets for such an outcome."

The US currency fell sharply against the yen, losing 0.50% to ¥101.78, and declined 0.04% against the euro, trading at 0.8957cents.

Both, the Fed and the Bank of Japan (BoJ) conclude their two-day meeting on Wednesday, and their respective decisions are expected to play a significant role in charting the course for the dollar and the yen in the short-term.

"With the probability of the Fed tightening in September having fallen sharply in recent times, the market is probably no longer positioned for a rate rise anyway," said Fawad Razaqzada, market analyst at Forex.com.

"Thus, in the event that the Fed remains on hold, the dollar could suck the sellers in with a short-term sell-off before squeezing them with an ever-sharper rally."

Traditionally, the two central banks are on diverging paths in terms of economic policies, and while the Fed is expected to keep its powder dry, Kit Juckes, head of forex at Société Générale, suggested the BoJ could cut rates again.

"The BoJ has struggled ever since their surprise decision to cut rates into negative territory backfired at the end of January," he explained.

"I think there's a really good case for the BoJ to grasp the nettle and ease again, to drive real yields down as inflation expectations rise."