Pound Edges Higher as Dollar Rally Awaits Key US Inflation, Jobs Data

The British pound edged higher against the U.S. dollar on Monday, but the greenback's recent powerful rally remains the central focus for markets ahead of a crucial week of U.S. economic data. Investors are closely watching upcoming inflation and employment figures to gauge whether the dollar can sustain its momentum and to refine expectations for the Federal Reserve's next policy decision.

As of 5:30 AM ET, the GBP/USD pair was up approximately 0.11% to 1.3373. Meanwhile, the euro saw a slight pullback against the dollar.

Dollar's Rally Pauses Ahead of Data Test

The dollar's recent advance has stalled as traders assess its valuation and await fresh catalysts. According to analysts at ING, the greenback now appears "a bit expensive" relative to its G10 peers based on the bank's short-term models.

"Data may re-become the primary driver for the dollar this week," said Francesco Pesole, an FX strategist at ING, in a note on Monday. He suggested that dollar bulls "might be happy with DXY around 101.0 for now, but risks are skewed towards 100.50."

The market's attention is fixed on two key U.S. releases: the Personal Consumption Expenditures (PCE) price index on Wednesday, followed by the September Non-Farm Payrolls (NFP) report on Friday. ING noted that a significant upside surprise in the jobs data could push Fed rate hike pricing above 20 basis points.

Fed and BoE Expectations Diverge

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Market expectations for a Federal Reserve rate hike at its October 28 meeting have moderated slightly, falling to 16 basis points of priced-in tightening from a peak of 19 bps last week, according to ING's analysis, which followed a period of hawkish commentary from Fed officials.

In contrast, the pound's modest gains were attributed more to the dollar's pause than to an improvement in the UK's domestic fundamentals. Michiel Tukker, a rates strategist at ING, noted that with Brent crude prices near $100 a barrel, markets have priced in more than four Bank of England rate hikes over the next year. However, the bank views this as "excessively hawkish," and its own economists do not forecast a BoE rate hike, seeing rates potentially falling by mid-2027 as inflation returns to target.

Market Outlook and Key Risks

ING strategists believe the dollar will struggle to maintain its recent strength "barring another major upside surprise in the payrolls report." Their analysis suggests the recent drop in the EUR/USD pair is "a bit overdone" and that it should trade above 1.140.

The outlook for a softer dollar faces several risks. These include a stronger-than-expected U.S. jobs report, a further surge in oil prices, or renewed stress in European bond markets, particularly concerning French government debt, ING warned. An escalation of geopolitical tensions in the Middle East was also cited as a factor that could push interest rates higher again.