Sterling traded slightly lower on Thursday as hawkish Federal Reserve rhetoric and hotter U.S. inflation held the dollar near multi-month highs. UK third-quarter GDP rose 0.7%, but that did not outweigh the dollar's strength. ING expects another Bank of England rate hike in February.
Sterling traded slightly lower on Thursday, down 0.05% at $1.3270 as of 05:12 ET (10:12 GMT), while the euro edged higher. Hawkish Fed rhetoric and hotter U.S. inflation kept the dollar near multi-month highs.
Dollar index returns to April 2025 levels
The dollar index has returned to levels last seen around the April 2025 Liberation Day announcement, according to ING FX strategist Francesco Pesole. He said real short-term interest rate differentials support that momentum. However, he said excessive dollar strength relative to short-term fair value remained contained.
Fed Governor Chris Waller, previously viewed as dovish-leaning, has put a 50-basis-point rate move in December on the radar. Markets still price in 28 basis points of easing for December, ING said. A stronger-than-expected U.S. consumer price index earlier this week added to the dollar's gains.
Friday's producer price index could prove more significant than Thursday's U.S. home sales data. According to Pesole: "That may be the catalyst for another USD leg higher,"
UK growth is solid, but ING expects a slowdown
British economic data remain solid, with GDP rising 0.7% in the third quarter from the previous three months. However, ING UK economist James Smith expects another Bank of England rate hike in February and warned that growth is likely to slow through the winter.
Utility bills are set to rise by about 25% in January. Smith therefore said he finds it hard to see how household spending avoids greater pressure into the new year. He expects the BoE to resume rate cuts before the end of 2027 or early 2028 at the latest.
Euro faces a test of $1.1000
The euro gained 0.03% to $1.1093. Pesole said the two-year EUR/USD swap rate differential has widened by about 15 basis points over five sessions, leaving the euro at material risk of testing $1.1000 in the coming days.
ING expects $1.1000 to provide relatively solid support. A stronger-than-expected U.S. producer price reading or further hawkish Fed commentary could increase the risk of a break lower.
Source: Investing.com
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