Pound, Euro Weaken as Hawkish Fed Commentary Boosts US Dollar

The British pound fell against the U.S. dollar on Tuesday, with the euro also losing ground, as hawkish commentary from Federal Reserve officials fueled a broad-based rally in the greenback. The dollar's strength became the primary market driver, outweighing specific domestic developments in the UK or Europe.

As of 5:02 AM ET, the GBP/USD pair was down 0.10% to 1.3354, while the EUR/USD pair slipped 0.11% to 1.1454. According to ING foreign exchange strategist Francesco Pesole, "The Fed's hawkish rhetoric is the most obvious driver right now."

Hawkish Fed Drives Dollar Strength

Recent statements from U.S. central bankers have reinforced expectations of a tight monetary policy stance. Chicago Fed President Austan Goolsbee warned that supply shocks combined with strong consumer spending could "keep inflation persistently high." Separately, St. Louis Fed President Alberto Musalem argued for a "front-loaded, gradual tightening," noting that current policy "remains accommodative."

These comments supported short-term U.S. interest rates and lifted the dollar against its G10 peers. Markets are now awaiting remarks later Tuesday from other Fed officials, including John Williams and Philip Jefferson. According to ING, any hawkish signals from these typically more centrist or dovish members "could have a more profound market impact."

Sterling Faces Fiscal Headwinds

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Adding to the pressure on sterling, new data from the UK's Office for National Statistics (ONS) showed that public sector net borrowing reached £18.3 billion in August. This figure surpassed all forecasts in a Reuters poll, which had a median expectation of £15.5 billion.

The cumulative fiscal deficit from April to August hit £77.3 billion, which is £8.1 billion higher than the forecast from the Office for Budget Responsibility (OBR). Despite the deteriorating fiscal picture, money markets are still pricing in an approximately 75% probability of a Bank of England rate hike in November. However, economists at ING said they still expect the central bank to hold rates and maintain a bearish outlook on the pound.

Euro Slips on Rate Differentials

The euro was not immune to the dollar's advance. ING noted that its fair value model for EUR/USD, driven primarily by equity performance and interest rate differentials, has fallen below 1.150 for the first time since late July.

While the European Central Bank has maintained its own hawkish tone, with an October rate hike still a possibility, ING's Pesole noted that in the near term, the "risk is for a retest of the 1.1320 to 1.1330 lows" seen in June. The bank's base case is for one more rate hike from both the Fed and the ECB this year, with a year-end EUR/USD target of 1.160.