Pound Slips as Hawkish Fed Bets and High Oil Prices Buoy U.S. Dollar

The British pound edged lower against the U.S. dollar on Monday, as elevated oil prices and persistent expectations of a more hawkish Federal Reserve provided strong support for the greenback. The euro also faced downward pressure amid the dollar's broad-based strength.

Market Snapshot

As of 5:22 AM ET, the currency markets reflected a cautious tone with a clear bias toward the dollar:

• The GBP/USD pair traded down 0.07% at $1.3385.
• The EUR/USD pair was also down 0.06% at $1.1479.

According to analysis from ING, while the dollar saw a brief pullback on Friday, its overall position remains firm as investors focus on central bank policy divergence.

Hawkish Fed and Energy Costs Drive Dollar

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The primary driver for the dollar's resilience is the market's continued pricing of an aggressive policy path from the U.S. Federal Reserve. "Market bets on a more hawkish Fed... remain the key rationale for more USD strength," said Francesco Pesole, a foreign exchange strategist at ING.

ING's analysis projects one more rate hike from the Fed this year, with a move in December seen as more probable than in October. Markets are currently pricing in 13 basis points of a rate hike for next month. With a relatively light economic calendar this week, high oil prices are also seen as a key supportive factor for the dollar.

European Outlook and Key Levels

In Europe, recent regional election results in Germany have added to political uncertainty, casting "some shadow" on the euro, according to ING. However, the bank stated that interest rate differentials and oil prices remain the more dominant drivers for the currency.

ING expects the European Central Bank (ECB) to deliver a rate hike in December, with markets pricing in 33 to 37 basis points of tightening by the end of the year. Despite this, ING sees "downside risks" for the EUR/USD pair this week, though a retest of the June lows around $1.1320 seems "premature." Such a drop would become a "realistic scenario," Pesole noted, if Brent crude oil returns to around $110 per barrel and markets increase bets on an October Fed hike.