Investing.com — Sterling traded lower on Thursday while the euro also slipped, as September Fed minutes showing policymakers leaning toward another rate hike kept the dollar supported.
GBP/USD was down 0.20% at $1.3195, while the EUR/USD pair fell 0.06% to $1.1189, as of 05:03 ET (09:03 GMT).
The minutes reinforced the dollar’s underlying support, said Chris Turner, global head of markets at ING. “This leaves the dollar well-supported and winning more friends in a slightly more difficult investment environment,” he wrote, adding that elevated Treasury yields and rising volatility “have sucked money out of the carry trade.”
Turner said he expects the dollar “to hold onto gains over the coming months” and sees the DXY index grinding up towards 102.85.
The minutes said “most participants assessed that another increase in the target range for the federal funds rate would likely be appropriate by year-end,” a hawkish signal. Participants also discussed “frustratingly high inflation” and were surprised by the pace of the AI build-out, which most saw as inflationary.
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Markets price a 25 basis point hike to 4.25% in December and a further 50 bps of tightening next year. ING considers that too aggressive, but Turner said he doubts markets will fight it this year.
A strong 10-year Treasury auction on Wednesday, with a solid bid-to-cover ratio and indirect bid, showed demand exists “if yields are high enough,” ING said. Little data is due today. Fed Governor Chris Waller, seen as a centrist, speaks at 0930 GMT and is expected to stick to the hawkish script.
The pound’s decline looked dollar-driven rather than the result of UK fundamentals. UK yields rose, with the 10-year gilt yield up 3.4 bps to 5.4833% and the 30-year up 3 bps to 6.011%.
Attention is on the Bank of England, where Governor Andrew Bailey and Claire Lombardelli, both centrists, speak today. “Any suggestion that they are ready to cross the Rubicon and vote for a hike could depress EUR/GBP further today,” Turner said. EUR/GBP has dropped sharply in recent weeks on French risk premium built into the euro, ING said. It sees strong support at 0.8455/65.
The euro is being driven by France rather than the European Central Bank, on which ING’s note was silent. French bonds fell after a report the Treasury could shorten the duration of its debt issuance, which investors feared would ease pressure on politicians to act.
