Investing.com — Sterling traded lower against the dollar on Tuesday while the euro also slipped, as a firmer dollar drew support from steadier AI-related sentiment and positioning ahead of Wednesday’s Federal Reserve decision, with the pound also braced for the UK Budget the same day.
Sterling was down 0.19% against the dollar at $1.3317, while the euro was up 0.27% at $1.1143, as of 05:57 ET (09:57 GMT).
“The dollar has found good support early this week, as stabilising AI-related sentiment has allowed markets to reconnect with the broader supportive backdrop of a hawkish Federal Reserve and high energy prices,” said Francesco Pesole, FX strategist at ING.
ING said Fed Chair Kevin Warsh’s reiteration of inflation commitments reinforces a structural floor for the dollar, a hawkish signal. Conference Board consumer confidence is due later Tuesday, with ING expecting 81.5 against a consensus of 81.0 and September’s 81.9.
Pesole said a surprise is unlikely to change the Fed’s tone, but “pricing for further tightening has shown some fragility of late.” Durable goods, new home sales and the Richmond Fed index are also due, and Israeli election results could move oil and the dollar.
HSBC said sterling fell as short-dollar positions were trimmed ahead of the Fed. The pound trails most major currencies today, gaining only against the yen, and is weakest against the New Zealand dollar.
The Budget adds a second layer of risk. Markets expect a low-key statement from Chancellor John Healey, leaving little room for anything less than a reassuring outcome and a low hurdle for a negative surprise.
Previous budgets have also delivered much larger surprises than anticipated, as seen in 2024. Reports over the weekend suggested Healey may add about £20 billion in investment over five years, removing one major downside risk. Markets are pricing in a 25-basis-point Bank of England rate hike to 4% in November.
ING said EUR/USD is 1.0-1.5% undervalued, largely because of France, but French spreads would need to widen “quite significantly” from 153 basis points to trigger another big drop. It expects the European Central Bank to hold on Thursday and says expectations of a big dovish shift “don’t look justified.” “For now, we don’t see it breaking below” the $1.110 level hit on Oct 14, Pesole said. HSBC puts resistance at $1.1257.
