Market snapshot
Sterling traded lower on Thursday and the euro also slipped as a broad-based sell-off in global long-dated bonds lifted U.S. and U.K. yields to multi-decade highs and left the dollar close to its strongest points this year. At 04:53 ET (08:53 GMT), GBP/USD was down 0.38% at $1.3215 and EUR/USD had fallen 0.37% to $1.1288.
The U.S. 10-year yield climbed to 5.340%, approaching a 52-week peak, while the dollar index tested the year-to-date high at 101.80. "Dollar debasement fears have been set aside for now as the cyclical story takes centre stage," said Chris Turner, global head of markets at ING. He added: "Barring some breakthrough in US-Iran negotiations, it looks like the dollar will stay bid in October," and noted that the index has risen in seven of the last 10 Octobers.
Data and drivers
August PCE inflation came in softer than expected but had little impact on rate expectations. The one-month USD OIS rate priced one year forward briefly fell 5 basis points before retracing that move by the close of the U.S. session. Meanwhile, ADP payroll data pointed to accelerating payrolls.
Traders are positioned for additional U.S. releases, with jobless claims and the ISM manufacturing reading due next. Markets are looking for an ISM headline around 55. Turner observed: "The sense is that the AI investment boom is seeping into broader parts of the US economy." He also highlighted speaking engagements from Fed voters Neel Kashkari (1330 CET) and Chris Waller (1600 CET) scheduled for the day.
Sterling under pressure
The pound was pressured by both the strength of the dollar and the rout in long-dated bonds. UK 30-year gilt yields rose to 6%, the highest level in nearly three decades. London's FTSE 100 fell nearly 2%, amplifying political and economic challenges and increasing scrutiny on Chancellor John Healey ahead of his first Budget this month.
Although sterling's decline was slightly larger than the euro's over the session, ING did not ascribe that differential specifically to gilt moves.
Nationwide reported that annual UK house price growth slowed to 0.8% in September from 1.6% the prior month. "Market activity and house prices have remained subdued in recent months, in part reflecting the uncertain economic backdrop," said Nationwide chief economist Robert Gardner.
Euro and European risks
EUR/GBP fell this week following comments from Prime Minister Andy Burnham calling for a debate on closer ties with the EU, including the possibility of rejoining. "We are years away from any clarity here," Turner said, noting a UK-EU summit around Nov. 20.
Turner suggested the euro's decline largely reflects a hawkish reassessment of Fed policy rather than an inherent euro weakness. He flagged the widening of the OAT-Bund spread to 127 basis points as "quite an alarming move," saying it could add a risk premium and constrain the European Central Bank's tightening cycle.
Several ECB officials including Joachim Nagel, Christine Lagarde and Isabel Schnabel were due to speak, but Turner judged that "the chances of the ECB 'out-hawking' the Fed seem slim."
Outlook and scenarios
On EUR/USD, ING suggested the 1.1300-1.1320 area "may feel like the bottom of the range." The bank added a conditional scenario: "If the OAT-Bund spread widens much further and US data stays strong, we will have to prepare for a drop into the 1.11-12 area," while offering no specific timeframe for such a move.
ING expects the dollar index (DXY) to trade around 101.50-101.80 during the day and said an upside breakout remains possible on stronger-than-expected payrolls or if European debt weakness further pressures the euro. The firm did not provide a target for GBP/USD.
Near-term market catalysts
- U.S. jobless claims and ISM manufacturing with a consensus ISM reading near 55.
- Comments from Fed officials Neel Kashkari and Chris Waller and various ECB speakers.
- Friday's U.S. nonfarm payrolls as the next major market catalyst.
Market participants will be watching how macro data and policy commentary interact with the recent surge in long-dated yields to determine near-term traction for the dollar, sterling and the euro.