Sterling was largely unchanged on Monday while the euro registered a steeper decline, as market participants positioned themselves ahead of a set of Federal Reserve minutes due on Wednesday - the first to be issued under Chair Kevin Warsh’s leadership.
As of 08:25 ET (12:25 GMT), GBP/USD was down 0.03% at 1.3348, while EUR/USD was weaker by 0.17% at 1.1417.
The dollar’s modest support reflects the interest-rate outlook rather than any single fresh catalyst. Last week’s soft June non-farm payrolls did not produce sustained pressure on the greenback. Money markets are now pricing in roughly 31 basis points of further Federal Reserve tightening for the year, a reduction from a peak near 43 basis points late last month but still consistent with a bias toward higher rates.
"Short dollar positions need to be backed up by a strong story, which is simply not there at the moment," said Chris Turner, global head of markets at ING. He added that the Fed is focused on restoring price stability after missing its 2% inflation target for five consecutive years, and that some or many Fed members could regard the next policy move as a rate hike.
Wednesday’s Federal Open Market Committee minutes are the principal event risk this week, with both market participants and many analysts expecting a hawkish tone.
Separately, today’s June ISM services report will be monitored for clues on inflation, with the prices-paid component expected to retreat from a recent four-year high. ING highlighted technical support for the U.S. dollar index around 100.60, and sees an overall upward drift bias for the dollar.
Sterling and U.K. dynamics
The pound’s slight softness on Monday is not being driven by fresh U.K. economic data. Instead, sterling remains close to a two-week high and is benefiting from the unwinding of stale short positions.
Political risk in the U.K. is, for now, more latent than active. Andy Burnham is expected to assume office as Prime Minister on July 20, and Energy Secretary Ed Miliband is the favourite to become Chancellor. ING noted that Miliband is positioned to the left of his recent predecessors and faces tight fiscal constraints, which could make tax increases the likely policy adjustment.
ING’s view that the Bank of England will not raise rates this year, combined with the potential for a left-leaning finance minister operating under fiscal limits, leaves sterling exposed to the risk of relinquishing recent gains once the political transition becomes clearer. EUR/GBP support at 0.8545 is cited as the near-term level to watch.
Euro area outlook
EUR/USD is consolidating above the 1.1400 level with technical resistance seen at 1.1475. Several European Central Bank speakers, including executive board members Isabel Schnabel and Philip Lane, are due to speak this week.
Market odds for a September ECB rate increase sit below 50% according to the commentary cited, although ING expects the ECB will stop short of declaring victory on inflation. Turner sees EUR/USD offered in the 1.13 to 1.14 range.
ING’s house view is that EUR/USD will remain within the 1.13-1.14 corridor until there is clearer evidence the Fed will proceed with a rate hike - a development that, in ING’s view, may not become apparent until the end of the quarter. A decisive break above 1.1475 or a dovish surprise in Wednesday’s FOMC minutes would prompt a reassessment of that outlook.