Investing.com — Sterling traded slightly higher on Monday while the euro slipped, as expectations of further Federal Reserve tightening and geopolitical tension kept the dollar well supported.
GBP/USD was up 0.08% at 1.3243. EUR/USD fell 0.07% to 1.1194, as of 04:37 ET (08:37 GMT).
Weekend news of continued Houthi strikes on Riyadh and a proposed “energy ceasefire” between Russia and Ukraine, to which Moscow has yet to respond, had little impact on currencies.
“FX markets are preferring to concentrate on the cyclical story of decent US growth, above-target inflation and the prospect of the Federal Reserve hiking 75bp from current levels,” said Chris Turner, global head of markets at ING. Turner said the dollar index’s “consolidation above 102 looks bullish.”
Attention turns to Wednesday’s U.S. September consumer price data. ING sees upside risks to the 0.2% month-on-month consensus for core inflation, which Turner said would keep Fed tightening expectations “broadly intact.”
ING said it may not be until next spring that those expectations drop out of money markets, a hawkish outlook for the dollar.
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U.S. bond markets are closed for the Columbus Day holiday, so trading should be thin. Third-quarter earnings season starts Tuesday with the big banks, and the IMF releases its World Economic Outlook this week.
Sterling’s gain was marginal and does not appear tied to UK fundamentals. No UK data or policy catalyst featured in the ING note, and the pound’s move looked like noise in a market driven by the dollar rather than a domestic story.
The euro stayed under pressure from French fiscal worries. French debt spreads are near their widest, and the government’s 43 billion euro savings plan is due for debate in parliament this week. Turner said consensus expects “little progress” but that the government may ultimately pass the budget by decree, which he called “hardly a euro positive.”
Speculators and the FX options market remain “quite bearish” on the euro, though Turner said positioning is “starting to get a little stretched.” Markets price 22 basis points of European Central Bank hikes in December, while ING expects 25 bp.
Eurozone September inflation is expected to be confirmed at 3.8% this week. “For the near term, a further dip towards 1.1100/1120 looks more likely,” Turner said.
