Sterling traded softer on Wednesday and the euro recorded larger losses as the market awaited potentially hawkish commentary from Federal Reserve Chair Kevin Warsh at the European Central Bank’s Sintra conference.
By 07:35 ET (11:35 GMT) GBP/USD had slipped to 1.3247, down 0.11%, while EUR/USD eased 0.22% to 1.1395. The U.S. dollar's firm tone underpinned most of the moves in the major currency pairs.
Market participants are increasingly focused on the inflation-fighting stance that Warsh may reiterate, a backdrop that market strategists say makes a dovish pivot unlikely. ING’s Global Head of Markets Chris Turner described the Fed’s recent message as one of determination to avoid missing the inflation target again, citing repeatedly elevated inflation readings as motivation for a sustained hawkish approach.
"The message coming from that press conference was that the Fed had missed its inflation target five years running and would not let that happen again," Turner said. He added that with core PCE running at 3.4% year-on-year and a strong payrolls report recently, "It is hard to see Warsh softening his hawkish tone."
Warsh is scheduled to speak at 1500 CET on a central bank panel in Sintra, delivering his first public remarks since the June Federal Open Market Committee meeting.
Money markets currently price roughly 22 basis points of Fed tightening for September and about 8 basis points for the July 29 meeting, with a cumulative 45 basis points expected by Q2 2027. Turner cautioned that upside risks to those projections remain, with some market participants still viewing a July hike as possible.
Later in the U.S. economic calendar, the ADP employment report for July could amplify dollar moves if it comes in above the consensus of 120,000. U.S. ISM manufacturing data, due later in the session, is another potential market catalyst.
ING analysts pointed to resilience in the DXY dollar index, which they saw holding support at 101.00 and pushing back toward the 101.70/80 area. That dollar strength, ING said, is the primary driver of the day’s currency moves.
Domestic UK data released on Wednesday showed the manufacturing sector remained in expansion in June, with the PMI at 52.5. That kept manufacturers above the 50 threshold for an eighth straight month, although the reading was softer than May’s four-year high of 53.9.
"Sustaining the upturn is becoming a bigger concern. Manufacturers are currently benefiting from client strategic stockpiling, as they safeguard against supply chain disruptions and expected price rises. A drop in the rate of growth of new work intakes suggests this boost is already starting to fade," said Rob Dobson, Director at S&P Global Market Intelligence.
Traders and strategists noted that pound moves on the day were mainly a reflection of dollar strength rather than any fresh reassessment of the UK economic outlook.
For the euro, ING expects the European Central Bank to maintain its hawkish rhetoric at Sintra even as June CPI figures, released on Wednesday and expected to show slight softening in both headline and core inflation, complicate the policy backdrop. Turner observed that the ECB "wants to talk tough to ride out this inflation hump," leaving one more rate hike priced into money market curves into early next year.
ING warned that a hawkish tone from Warsh could put EUR/USD under further pressure, with the pair potentially retesting the 1.1325 lows. Their base case targets a DXY recovery toward 101.70/80 and EUR/USD weakness toward 1.1325 in the near term. ING said that only a notably softer-than-expected Warsh commentary or a significant miss on U.S. ISM data would meaningfully alter that view.
Market context
- GBP/USD: 1.3247, down 0.11%
- EUR/USD: 1.1395, down 0.22%
- Core PCE: 3.4% year-on-year (as referenced by ING)
- ADP consensus: 120,000 (U.S. employment report)
- UK Manufacturing PMI: 52.5 in June, May at 53.9
- Money market pricing: ~22 bps of tightening for September, ~8 bps for July 29, cumulative 45 bps by Q2 2027