Sterling held flat at 1.3289 on Wednesday, near its weakest level in almost a month, as traders sat out ahead of the Federal Reserve's rate decision. ING expects a Fed hold to unwind precautionary dollar positioning, while UBS looks for the Bank of England to leave its benchmark rate at 3.75% on Thursday.
Sterling traded little changed on Wednesday while the euro slipped slightly, as investors held back from major dollar bets ahead of the Federal Reserve's rate decision. As of 06:52 ET (10:52 GMT), GBP/USD was flat at 1.3289, down 0.03%, while EUR/USD eased to 1.1384, down 0.05%.
Dollar carries a pre-Fed cushion
Precautionary positioning for a potential surprise Fed hike could keep the dollar supported going into the FOMC announcement, said Francesco Pesole, FX strategist at ING. He noted the dollar index has shown little sensitivity to the recent decline in oil prices despite softer consumer confidence data.
But that cushion may not hold. According to Pesole: "resilience will be tested heavily today", with markets pricing a 25-30% probability of a hike. Pesole expects the dollar to come under pressure unless Fed Chair Kevin Warsh surprises with a hawkish spin or more than two dissenters appear, targeting a test of 101.0 in the dollar index by week's end.
The consensus view is for the Fed to hold, with two dissenters, Lorie Logan and Beth Hammack, expected to push for a hike. That scenario would leave year-end rate expectations of 41bp broadly intact while still pointing to dollar downside, Pesole said, as a hold should unwind precautionary USD positioning.
Pound looks past domestic data to Thursday's BoE vote
The pound hovered near its weakest level in almost a month as traders looked past domestic data toward the Fed and Thursday's Bank of England decision. UBS expects the Bank to keep its benchmark rate unchanged at 3.75%, with the vote split staying at 7-2 as Megan Greene and Huw Pill vote for a 25 basis point hike.
Softer prints underpin that call. Inflation came in lower than expected over the past three months, including June's reading released Tuesday. UBS anticipates the next move will be a rate cut in February and April 2027, against market pricing of 44.5 basis points in increases by year-end.
Euro still waits on risk sentiment
For the euro, ING flagged that renewed military strikes in the Gulf overnight warrant caution, though the bank believes EUR/USD may have already bottomed last week. Its baseline case for a modest dovish Fed surprise points to a move into the 1.1400-1.1450 range over the coming days.
A hawkish surprise from Warsh, or a broader hawkish vote split, would likely keep the dollar supported and delay the anticipated euro and sterling recovery.
Sources: Forex News, Economic Indicators News
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