Sterling traded marginally lower on Tuesday while the euro softened, with investors keeping the dollar broadly steady in the run-up to a pivotal U.S. inflation report that may shape Federal Reserve policy prospects for September.
As of 07:07 ET (11:07 GMT), GBP/USD fell 0.03% to 1.3502, while EUR/USD slipped 0.03% to 1.1542.
"Realised FX volatility is sinking in mid-August," said Chris Turner, Global Head of Markets at ING. "However, it looks like investors are not going to be unnerved by that meeting and will, instead, be comfortable picking up carry from high-yielding FX."
Turner highlighted the bond market as a key latent risk, pointing to a recent corporate financing development as an area of attention. He referenced a Monday announcement that Nvidia would partner with six investment houses to arrange $500 billion in debt financing for customers.
"A sell-off in the bond market probably remains one of the key threats to a benign environment over the coming months," Turner added. ING expects the DXY dollar index to trade in a 99.50-100.00 range through Wednesday's CPI release.
Markets currently assign roughly a 50% probability to a 25 basis point Fed rate hike at the September 16 meeting. The immediate data calendar puts the spotlight on July existing home sales and the weekly ADP private payrolls release on Tuesday, where the four-week moving average for ADP has declined to +18,000 from a peak near +38,000 in April.
ING warned that a downside surprise in the ADP print could briefly weigh on the dollar following Friday's soft July payrolls reading. The consumer inflation data scheduled for Wednesday is the next major market catalyst; there are no Federal Reserve speakers scheduled on Tuesday.
There was no clear domestic catalyst behind sterling's modest decline, with the move attributed to positioning around the dollar rather than any fresh change in U.K. fundamentals. On the domestic data front, new figures from the British Retail Consortium provided a mixed picture.
Total U.K. retail sales rose 1.3% year-on-year in July, below the 12-month average of 1.8% and down sharply from 2.5% growth recorded in July 2025. Non-food sales contracted 0.7% on the year, a weakness the BRC linked in part to high temperatures keeping shoppers off the high street.
"Consumer demand has struggled in the heat, leaving retailers facing a challenging start to the second half of the year," said Helen Dickinson, Chief Executive of the BRC. "Household budgets remain stretched, consumer confidence is fragile, and retailers continue to grapple with rising operating costs."
Food sales outperformed, rising 3.8% year-on-year, above its 12-month average of 3.4%, a boost partly attributed to the final week of the World Cup. However, IGD chief executive Sarah Bradbury cautioned that "pressures are building across the food supply chain as a result of the conflict in the Middle East and prolonged hot weather, increasing the likelihood of higher food costs and renewed pressure on household budgets as we move into the autumn."
Volatility in the euro-dollar cross has also eased. One-year realised volatility for EUR/USD has fallen to 5.8%, matching a low last seen in November 2024, as European central bankers remain on summer recess until mid-September.
ING noted that European investors in U.S. assets may be underhedged on the dollar, a vulnerability Turner described as "more a function of the November midterms than Fed decisions." For Tuesday, ING sees EUR/USD trading in a 1.1515-1.1560 range, reflecting the subdued volatility environment that is unlikely to change materially until policymakers return from holiday.
ING's current framework assumes a broadly dollar-soft, carry-friendly backdrop stretching into the autumn. Turner said that for that view to change, the DXY would likely need to break above 100 - an outcome most plausibly produced by a hot CPI reading on Wednesday or an unexpectedly hawkish pivot from the Fed.
Elsewhere in FX, AUD/USD was trading with modest gains and is targeted at 0.73 by year-end following the Reserve Bank of Australia's hawkish hold at 4.35% earlier on Tuesday.
The mix of U.S. data releases this week, muted realised FX volatility, and specific developments in retail and corporate financing have left currency markets in a watchful, range-bound posture ahead of the next major macro inputs.