Sterling and the euro both retreated on Tuesday as the dollar stayed broadly bid ahead of Wednesday’s Federal Reserve decision, with markets pricing nearly a 40% chance of a rate hike. ING says the pound’s slide reflects dollar strength rather than any UK development, and this week’s Bank of England meeting could add to the pressure.
The dollar stayed broadly bid on Tuesday as investors positioned for a hawkish Federal Reserve meeting, with markets pricing nearly a 40% chance of a rate hike on Wednesday. Sterling and the euro both gave ground.
As of 06:30 ET (10:30 GMT), GBP/USD fell to 1.3278, down 0.16% on the day. EUR/USD slid to 1.1357, down 0.13%.
Sterling’s slide is a dollar story, not a UK one
Tuesday’s decline in sterling was not driven by UK-specific developments. Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING, said the pound was instead caught up in broader dollar strength ahead of the FOMC.
The euro’s weakness also reflected dollar dynamics rather than domestic euro-area news. Turner noted that even this week’s lower energy prices, a boon for Europe, have failed to lift the single currency, with the Fed story setting the tone.
Attention now turns to this week’s Bank of England meeting. According to ING, it could weigh on sterling by reminding traders that “the bar is high for a rate hike”.
ADP jobs data leads Tuesday’s US releases
Traders are awaiting weekly ADP jobs data, June’s advanced trade balance and July consumer confidence figures due later Tuesday. The ADP print is seen as the key release after a soft initial jobless claims report last week, and an upside surprise would likely prove a mild dollar positive.
Turner said investors are unlikely to reduce dollar positioning before Wednesday’s Fed meeting. He flagged lower oil prices and a sell-off in chip stocks, tied to Chinese competition and scrutiny of US hyper-scaler megadeals, as risks to watch.
ING sees the dollar index bid near 101.50
Turner said the DXY dollar index can remain bid near 101.50, with an outside risk of pushing up to June’s 101.80 high. He also said the case for an early Fed move is gaining credibility among some observers as a way to boost the central bank’s inflation-fighting credentials and lessen the need for subsequent tightening.
For the single currency, ING sees a break of 1.1360 support opening the door to a retest of the 1.1325 low, and expects EUR/GBP to hold gains near 0.8550. The bank forecast last week that the cross would climb toward 0.88 later this year.
Its base case is further dollar strength into Wednesday’s decision, with USD/CHF — its preferred vehicle for expressing hawkish Fed views — potentially reaching 0.85 in August if the Fed hikes aggressively. A less hawkish Fed statement, or a downside surprise in Tuesday’s US data, would be needed to reverse the dollar’s bid tone.
Source: Investing.com
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