Sterling traded little changed against the dollar on Friday even after stronger-than-expected UK GDP data, as investors positioned for a US inflation print that could cement a Federal Reserve rate hike next week. The dollar is rebuilding its link to long-end Treasury yields, while the euro slipped on a hawkish ECB.
GBP/USD traded at 1.3504, down 0.06% on Friday, with EUR/USD falling 0.09% to 1.1599 as of 05:10 ET. Sterling's resilience is not being driven primarily by UK fundamentals, according to ING, even as gilts sold off again.
Dollar Rebuilds Its Treasury-Yield Link
The dollar is rebuilding a positive correlation with long-end Treasury yields, according to ING: "We continue to see upside potential for the dollar."
A smaller-than-expected Treasury buyback and Treasury Secretary Scott Bessent's reluctance to fight the bond market have helped restore that link, Pesole said. Oil's rally since Gulf tensions flared and stalled yen strength are also feeding a defensive rotation back into the dollar, he added.
Markets have priced 18 basis points for next week's FOMC meeting ahead of Friday's August CPI data, with consensus at 0.4% headline and 0.2% core month-on-month. Fed Chair Kevin Warsh has set a high bar for data to derail rate hike expectations, while Governor Christopher Waller has struck a more dovish tone, saying a hike may not be needed if inflation keeps improving. Pesole said a soft CPI print might weigh on the dollar but likely wouldn't push September hike odds below 50%.
UK Growth Beats Forecasts, but Gilts Sell Off
UK GDP rose 0.4% in July, beating expectations after June's 0.3% gain, with roughly half the increase coming from IT, a sector ING says may be picking up an AI-driven investment boost. Chancellor Rachel Reeves's pledge to budget discipline is working in that respect, Pesole said, though it leaves little room for pro-growth measures.
Even so, 10-year gilt yields neared 5.5% and 30-year yields moved close to 6%, a move ING attributes to higher beta to US Treasuries rather than domestic fiscal stress. BofA expects the Bank of England to hold rates at 3.75% next week in a 6-3 vote, with Pill, Greene and Mann dissenting for a hike, arguing that market pricing of nearly four hikes by next year is excessive.
Euro Slips After Hawkish ECB Hike
The euro drew some support from Thursday's hawkish ECB hike, after President Christine Lagarde flagged more tightening with October firmly in play and 2028 inflation forecasts lifted to 2.1% headline and 2.3% core. ING has trimmed conviction on its 1.150 EUR/USD call given the hawkish shift, though downside risks remain heading into next week's Fed decision, Pesole said.
ING's fourth-quarter targets stand at GBP/USD 1.33, EUR/GBP 0.87 and EUR/USD 1.150.
Source: Investing.com
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