Sterling today: Pound slips as hawkish Fed outlook lifts dollar broadly

Sterling traded lower on Wednesday while the euro also retreated, as markets priced in a more hawkish Federal Reserve path following Chair Kevin Warsh’s remarks last week, denting appetite for both major currencies against the dollar.

GBP/USD fell to 1.3509, down 0.04%, while EUR/USD dropped to 1.1577, down 0.13%, as of 03:52 ET (07:52 GMT.)

"We think the cyclical Fed story can trump the dollar bearish debasement theme and some bearish US yield curve flattening can see the dollar advance against the low-yielders," said Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING. 

Turner said ING favours the dollar index (DXY) "grinding higher to the 100.10/20 area and probably moving a little higher tomorrow on the Waller event," adding that renewed energy price gains were reinforcing the hawkish tone priced across money markets.

Fed Chair Warsh’s hawkish speech on Friday has shifted the market’s baseline toward a September rate hike, with inflation seen as not falling quickly enough to target against a "reasonably strong" economy, according to ING. 

Traders are awaiting Wednesday’s Beige Book release and a moderated discussion Thursday with Fed Governor Christopher Waller, who ING expects to reinforce the hike narrative "barring some surprisingly dovish data" ahead of the September 16 FOMC meeting. 

Wednesday’s U.S. calendar includes the ADP employment report and Durable Goods Orders, though Turner noted "even weak labour market data may not be enough to stop the Fed from hiking."

Wednesday’s sterling weakness is not being driven by UK-specific fundamentals; the move reflects broad dollar strength tied to the Fed repricing rather than domestic political or economic developments. 

ING’s commentary made no reference to Bank of England policy or UK data as a driver of Wednesday’s session.

The euro faces mounting headwinds, according to ING, with higher energy prices and a more hawkish Fed pushing EUR/USD lower within recent ranges. 

"Below 1.1565/70, EUR/USD can extend its drop to the 1.1520 area and we think something like 1.15 looks an appropriate target for month-end," Turner said. 

He noted currently around 80bp of ECB tightening is priced by next summer, a scenario ING’s team views as "highly unlikely," though the market remains reluctant to fade that pricing pending more clarity on the Middle East. 

EUR/CHF was trading above 0.94, with hawkish Fed commentary also weighing on the Swiss franc, gold and bitcoin.

ING sees USD/CHF challenging July highs near 0.82 barring fresh turmoil at the long end of bond markets. 

The broker’s bullish dollar view would be undercut if long-end Treasury yields sell off more than expected, which Turner said "can probably drag the dollar a little lower even as high-yield FX underperforms amidst higher generalised volatility."