Dollar Strengthens on Hawkish Fed Bets, Pushing Pound and Euro Lower

The British pound and the euro weakened on Wednesday as the U.S. dollar continued to climb, fueled by persistent expectations that the Federal Reserve will maintain its hawkish monetary policy stance to combat inflation.

As of 5:26 a.m. ET, the GBP/USD pair was down 0.40% to 1.3292, while the EUR/USD pair traded 0.31% lower at 1.1414.

Hawkish Fed Outlook Drives Dollar Demand

The dollar's strength has persisted even amid falling oil prices and signs of improved risk appetite, underscoring the market's focus on central bank policy. "This once again speaks to how Fed policy expectations are the dominant driver in the current environment," said Francesco Pesole, a forex strategist at ING, in a note. He added that hawkish commentary from Fed officials has been "enough to keep dollar demand afloat."

ING noted that a move for the U.S. Dollar Index (DXY) to the 101 level remains a "very achievable near-term target." This sentiment has been reinforced by recent commentary from officials like Richmond Fed President Thomas Barkin, who suggested a single rate hike may not be sufficient, and by robust high-frequency labor data, including initial jobless claims falling back below 200,000.

Euro Faces Headwinds Despite Strong PMI

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The euro's decline came despite a surprise uptick in regional economic activity. The Eurozone's composite PMI rose to 53.1 in September, a three-year high, beating expectations for a slight decline. The increase was driven by the services sector, with Germany's services PMI jumping from 49.7 to 52.9.

According to ING, the strong PMI figures make it "harder for even the most dovish ECB policymakers to rule out another rate hike." However, the bank maintains that the risks for EUR/USD remain skewed to the downside, citing the potential for markets to price out European Central Bank tightening faster than the Fed's, especially if oil prices fall. ING's base case is that the Fed is more likely to act before the ECB, which continues to weigh on the single currency.

Sterling's Move Tied to Broader Trend

The pound's weakness on Wednesday was not driven by domestic factors, as there were no major U.K. economic data releases or comments from Bank of England officials. Instead, sterling's move lower was a direct consequence of the broad-based strength in the U.S. dollar, highlighting the greenback's dominant role in currency markets.