Story
Sterling Holds Steady as Dollar Strength Dominates Ahead of Fed Minutes
Summary
The British pound traded flat against a resilient U.S. dollar, as investors looked past last week's soft jobs data and focused on expectations for a hawkish tone from the Federal Reserve's upcoming meeting minutes.
The British pound held steady against the U.S. dollar on Monday, while the euro weakened, as currency markets positioned for potentially hawkish signals from the Federal Reserve's upcoming policy meeting minutes.
As of early Monday trading, the pound was little changed against the dollar, with the GBP/USD pair trading near 1.3348. Meanwhile, the EUR/USD pair fell 0.17% to 1.1417, highlighting broader strength in the greenback.
Dollar Shrugs Off Weak Data
The dollar's resilience comes despite a soft U.S. non-farm payrolls report for June, which failed to dent market expectations for monetary tightening. The focus for investors has now shifted squarely to the Federal Open Market Committee (FOMC) minutes due on Wednesday, which are widely expected to carry a hawkish tone.
Money markets are currently pricing in approximately 31 basis points of Federal Reserve rate hikes this year. While this is down from a peak of 43 basis points last month, it still reflects a persistent bias toward higher U.S. interest rates. "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, in a note. Turner added that the Fed "is committed to restoring price stability... and some (or many) members could see the Fed’s next move as a rate hike."
AdSterling's Domestic Outlook
The pound's recent performance has been driven less by domestic fundamentals and more by the unwinding of old short positions, which has pushed it near a two-week high. However, analysts see potential headwinds on the horizon from UK political developments.
With a new prime minister expected to take office on July 20, attention is turning to the potential new government's fiscal policy. ING analysts noted that the incoming administration faces "severe fiscal constraints," which could make tax increases a likely policy tool. This, combined with the bank's view that the Bank of England will not raise rates this year, leaves sterling vulnerable to giving back its recent gains once the political transition is complete.