Investing.com — Sterling traded at a two-week high on Thursday while the euro rebounded off one-year lows, as the dollar softened ahead of U.S. jobs data after new Fed Chair Kevin Warsh gave no fresh hawkish signal at a Sintra panel appearance.
rose to $1.3310, up 0.25% as of 08:04 ET (12:04 GMT) while climbed to $1.1402, up 0.21%
“It looks like FX and interest rate markets…..were getting a little ahead of themselves in expecting confirmation of hawkish views from Kevin Warsh at Sintra yesterday,” said Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING.
Turner noted that when the panel produced no hawkish rhetoric, “US short-dated rates dropped 5-6bp and the dollar sold off,” though those moves have since been retraced. “Warsh seems happy to let the data drive market expectations and keep the monetary policy debate in-house for FOMC meetings,” he added.
Attention now turns to Thursday’s US June non-farm payrolls report, with consensus around over 115,000 and a whisper number near 140,000; the unemployment rate is expected to hold at 4.3%.
Turner said the dollar “can remain relatively supported” barring a big miss and large downward revisions, with the sitting mid-range and capable of testing 101.50/80 on a 100k+ print.
The sterling move is not being driven by UK fundamentals, ING said. Bank of England Governor Andrew Bailey struck a dovish tone at Sintra, flagging a softening UK economy but ruling out imminent rate cuts.
Turner attributed the rally instead to short-covering, “Asset managers in particular have been running some large sterling short positions,” and with volatility falling, “we are probably seeing some position liquidation.”
UK politics is seen as a non-factor for now, Andy Burnham is expected to become Labour leader and prime minister on July 20, with his choice of chancellor and first budget, likely in early November, seen as the next domestic catalysts. ING flagged Ed Miliband’s potential appointment as chancellor as “probably a little sterling negative.”
On the euro, ING’s baseline view is that EUR/USD retests $1.1300 over coming weeks as markets price a 50bp Fed hike this year, though a house view of no Fed hike could see the pair trade back into the 1.16/1.18 range by November/December.
Softer eurozone inflation, 2.8% headline in June versus 3.2% in May, and dovish comments from ECB President Christine Lagarde have added pressure, though ING’s macro team cautioned a September ECB hike, currently pricing 15bp, is not completely off the table as energy subsidies expire.
ING sees the current breakout extending only to 0.8545/50, with a sustained move requiring a clearer dovish shift from the BoE’s Bailey-led faction.