Story
Sterling Holds Steady as Dollar Firms Ahead of Fed Minutes
Summary
The British pound traded in a narrow range against the U.S. dollar on Monday, as currency markets looked past soft U.S. jobs data and focused on expectations for a hawkish tone from the Federal Reserve's upcoming policy meeting minutes.
The British pound was little changed against a resilient U.S. dollar on Monday, as investors largely shrugged off last week's weaker-than-expected jobs report and positioned for potentially hawkish signals from the Federal Reserve. The euro fell more sharply against the dollar amid the focus on U.S. monetary policy.
As of 08:25 ET, the GBP/USD pair was trading nearly flat at 1.3348, a marginal dip of 0.03%, according to Investing.com data. Meanwhile, the EUR/USD fell 0.17% to 1.1417.
Dollar Finds Support in Fed Outlook
The dollar's stability comes ahead of Wednesday's release of the Federal Open Market Committee (FOMC) minutes, the first under the leadership of new Chair Kevin Warsh. Analysts widely expect the minutes to carry a hawkish tone, reinforcing the central bank's commitment to fighting inflation.
Despite a soft non-farm payrolls report for June, money markets continue to price in a bias toward higher U.S. interest rates. According to the source, traders are pricing in approximately 31 basis points of Federal Reserve tightening for the remainder of the year. While down from a peak of 43 basis points last month, this still suggests expectations for at least one more rate hike. "Short dollar positions need to be backed up by a strong story, which is simply not there at the moment," said Chris Turner, global head of markets at ING.
AdSterling Faces Domestic Headwinds
While sterling is currently trading near a two-week high, supported by the unwinding of old short positions, its strength is not being driven by domestic fundamentals. Analysts see potential headwinds for the pound stemming from the UK's political and economic landscape.
Latent political risk remains a key factor, with Andy Burnham expected to become Prime Minister on July 20. ING analysts noted that the frontrunner for Chancellor, Ed Miliband, faces significant fiscal constraints, which could make tax increases a likely policy tool. Combined with ING's view that the Bank of England will not raise rates this year, analysts believe sterling remains vulnerable to giving back its recent gains once the political transition is complete.