Investing.com — Sterling traded nearly flat on Monday while the euro fell more sharply, as investors positioned for what analysts expect will be a hawkish set of Federal Reserve minutes due Wednesday, the first to be released under Chair Kevin Warsh’s leadership.
As of 08:25 ET (12:25 GMT), dipped 0.03% to 1.3348, while fell 0.17% to 1.1417.
The dollar is drawing quiet support from the rate outlook rather than any single catalyst.
Last week’s soft June non-farm payrolls failed to inflict lasting damage on the greenback, with money markets now pricing roughly 31 basis points of Federal Reserve tightening this year, down from a peak of 43bp late last month but still consistent with a bias toward higher 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.
The Fed, he added, “is committed to restoring price stability after missing its target five years in a row, and some (or many) members could see the Fed’s next move as a rate hike.”
Wednesday’s FOMC minutes are the key event risk this week, with markets and analysts expecting a hawkish tone.
Turner noted the Fed is committed to restoring price stability after missing its 2% target for five consecutive years, and said some, or many, members could view the next move as a rate hike.
Today’s June ISM services print will be watched for inflation signals, with the prices-paid component seen retreating from a four-year high. ING sees support at 100.60 holding, with an upward drift bias.
Sterling’s softness on Monday is not driven by UK domestic fundamentals. The pound is near a two-week high and retains support from the unwinding of stale short positions.
UK political risk remains latent rather than active: Andy Burnham, the Makerfield MP, is expected to take office as Prime Minister on July 20, with Energy Secretary Ed Miliband the frontrunner for Chancellor.
ING flagged that Miliband stands further left than his predecessors and faces severe fiscal constraints, leaving tax rises as the likely adjustment tool.
That backdrop, combined with ING’s view that the Bank of England will not raise rates this year, leaves sterling vulnerable to giving back recent gains once the political transition crystallises. support at 0.8545 is seen as the near-term line to hold.
EUR/USD is consolidating above 1.1400 with resistance at 1.1475 capping the topside. Several ECB speakers are due this week, including executive board members Isabel Schnabel and Philip Lane.
A September ECB hike carries less than a 50% probability in the market, though ING expects the ECB to stop short of sounding the all-clear on inflation. Turner sees EUR/USD offered in the 1.13–1.14 range.
ING’s house view targets EUR/USD staying in the 1.13-1.14 area until there is clearer evidence the Fed will hike, a picture that may not crystallise until quarter-end. A decisive break above 1.1475 or a dovish surprise in Wednesday’s FOMC minutes would prompt a reassessment.