Sterling firmed on Thursday and the euro staged a modest rebound after the dollar weakened in the wake of a Sintra panel appearance by newly appointed Federal Reserve Chair Kevin Warsh that failed to deliver a stronger hawkish message. The market reaction saw GBP/USD trade up to $1.3310, a rise of 0.25% as of 08:04 ET (12:04 GMT), while EUR/USD climbed to $1.1402, an increase of 0.21%.
Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING, said currency and interest rate markets appeared to have been expecting a clearer hawkish tone from Warsh. When that expectation was not met, Turner noted, short-dated U.S. rates fell by 5-6 basis points and the dollar weakened, although much of those moves were subsequently reversed.
Turner added that Warsh appears content to let incoming data shape market expectations and to keep debate around monetary policy confined to Federal Open Market Committee meetings. With that dynamic in place, attention has shifted to the U.S. labor market report for June. Consensus forecasts around the non-farm payrolls print are slightly above 115,000, with a whispered figure close to 140,000; the unemployment rate is expected to remain at 4.3%.
ING's view, as relayed by Turner, is that the dollar could remain relatively supported unless the payrolls number produces a large downside surprise or substantial negative revisions. The dollar index is positioned mid-range, and Turner suggested it could test 101.50/80 on a print above 100,000.
ING emphasised that sterling's advance does not appear to be founded on UK economic fundamentals. Bank of England Governor Andrew Bailey delivered a dovish message at Sintra, highlighting a softening in the UK economy while ruling out immediate rate cuts. Rather than domestic drivers, Turner attributed the sterling rally to position dynamics: asset managers had accumulated significant sterling short positions, and with volatility falling, some of those positions are being covered.
Political developments in the UK are not considered a market driver at present. Andy Burnham is expected to become Labour leader and prime minister on July 20, and markets are likely to focus next on his selection for chancellor and the timing of the first budget, which is expected in early November. ING cautioned that the appointment of Ed Miliband as chancellor would probably be slightly negative for sterling.
On the euro, ING sets a baseline in which EUR/USD retests $1.1300 over the coming weeks as markets factor in a 50 basis point Fed rate hike this year. However, ING also allows that if the house view of no Fed hike prevails, EUR/USD could return to the 1.16/1.18 area by November or December.
Pressure on the euro has been bolstered by softer eurozone inflation - headline inflation eased to 2.8% in June from 3.2% in May - and dovish commentary from European Central Bank President Christine Lagarde. ING's macro team nevertheless warned that a September ECB rate move, currently pricing about 15 basis points, cannot be ruled out entirely as temporary energy subsidies expire.
Regarding EUR/GBP, ING expects the recent breakout to extend only as far as 0.8545/50 unless there is a clearer dovish pivot from the Bank of England's Bailey-led faction. For now, currency moves appear to be governed by central bank signaling and positioning ahead of the key U.S. labor market release.
Market data referenced in this article:
- GBP/USD: $1.3310, up 0.25% at 08:04 ET (12:04 GMT)
- EUR/USD: $1.1402, up 0.21%
- Eurozone headline inflation: 2.8% in June, down from 3.2% in May
- Consensus for U.S. June non-farm payrolls: just over 115,000; whisper near 140,000; unemployment expected at 4.3%