Dollar Stabilizes After Sell-Off, Pressuring British Pound Ahead of Key Data

The U.S. dollar stabilized on Wednesday after a recent bout of selling, causing the British pound to edge lower while the euro held steady, as foreign exchange traders positioned themselves ahead of key U.S. inflation data and upcoming central bank meetings.

Market Snapshot

As of 6:05 AM ET, the GBP/USD pair traded down 0.05% at 1.3534, while the EUR/USD was little changed at 1.1625. Wednesday's modest decline in sterling was not driven by domestic fundamentals but was seen as a passive reaction to the dollar's broader recovery, according to market analysts.

A 'Puzzling' Dollar Weakness

The dollar's pause comes after a period of underperformance that has perplexed some strategists. Chris Turner, Global Head of Markets at ING, described the dollar's recent price action as "disappointing and somewhat confusing" in a note on Wednesday, pointing out that the currency has failed to capitalize on favorable fundamentals.

ING noted that factors like rising energy prices, which should benefit the U.S. relative to Europe and Asia, have not provided a lift. The bank identified two primary drags on the dollar:

• Vulnerability in USD/JPY: Turner highlighted that "global macro hedge funds are positioning for a break below 150 in USD/JPY in the coming months."
• Negative Correlation with Equities: A strong inverse relationship between high global stock prices and the dollar is also acting as a headwind.

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Central Banks and Data in Focus

Investors are now looking ahead to Friday's U.S. Consumer Price Index (CPI) report for August, which ING called the "last piece of the puzzle" before the Federal Reserve's policy decision next week. The bank's analysts are forecasting a 25 basis point interest rate hike from the Fed.

Across the Atlantic, the European Central Bank (ECB) is set to meet on Thursday. ING anticipates a "dovish hike," suggesting the central bank will likely stop short of endorsing market expectations for an additional 50 basis points of future tightening.

Key Technical Levels

According to ING, the Dollar Index (DXY) has strong support at the 98.55/65 level. A break below this, likely driven by weakness in the USD/JPY pair, could open a path toward 98.00. For the euro, ING sees significant resistance for EUR/USD at 1.1640/45 and maintains a forecast for the pair to fall back toward 1.15 by the end of September, assuming the Fed proceeds with its expected rate increase.