Pound Strengthens as Dollar Falters on Yen Volatility and Fed Rate Speculation

The British pound gained ground against the U.S. dollar on Thursday, driven by broad-based weakness in the greenback rather than UK-specific fundamentals. The dollar's slide followed a sharp overnight drop against the Japanese yen, which sparked renewed speculation of currency intervention by Japanese authorities.

As of 05:05 ET, the GBP/USD currency pair rose 0.09% to trade at 1.3499. The euro also firmed, with EUR/USD gaining 0.18% to 1.1609. Strategists noted that sterling's move was almost entirely a consequence of the dollar's reaction to the yen's volatility.

Dollar Outlook and Fed Bets

Despite the day's downturn, some analysts maintain a bullish outlook for the dollar. "We retain a preference for the upside in the dollar, as front-end rates and higher energy prices both point up," said Francesco Pesole, an FX strategist at ING. The main risk to this view, he added, would be renewed U.S. Treasury interventionism.

Market pricing for a September Federal Reserve rate hike eased slightly, dropping from 18 to 15 basis points. However, ING attributed this shift more to a pause in the recent oil price rally than a significant dovish repricing of Fed expectations. Upcoming U.S. data, including the ISM services report, is being watched closely, though Pesole noted, "The bar to drive the Fed away from a September hike looks fairly high, especially for second-tier data."

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European Central Bank in Focus

The euro's advance comes ahead of next week's European Central Bank (ECB) meeting, where a rate hike is widely anticipated. However, analysts at ING cautioned that markets may be overly aggressive in their expectations. The firm's macro team suggested that ECB policymakers may be more concerned about widening European bond spreads than second-round inflation risks, potentially leading to a less hawkish message.

ING noted that the EUR swap curve is now pricing in three hikes by April 2027, which it described as "overly hawkish." The firm sees risks for the EUR/USD skewed to the downside, forecasting a potential return to the 1.150-1.155 range in the near term.