Investing.com — Sterling traded lower on Tuesday while the euro also retreated, as the dollar stayed broadly bid with investors positioning for a hawkish Federal Reserve meeting Wednesday, with markets now pricing nearly a 40% chance of a rate hike.
As of 06:30 ET (10:30 GMT), fell to 1.3278, down 0.16% on the day, while slid to 1.1357, down 0.13%.
“It feels like the FX market is taking the possibility of a Fed hike tomorrow more seriously,” said Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING.
Turner said the case for an early move is gaining credibility among some observers as a way to “boost the Fed’s inflation-fighting credentials and ultimately lessen the need for subsequent tightening,” adding that the central bank’s “lack of communication has certainly created fertile ground for such speculation.”
He said the dollar index “can remain bid near 101.50, with an outside risk of pushing up to June’s 101.80 high.”
Traders are awaiting weekly ADP jobs data, June’s advanced trade balance and July consumer confidence figures due later Tuesday, with the ADP print seen as the key release after a soft initial jobless claims report last week; an upside surprise would likely prove a mild dollar positive.
Turner said investors are unlikely to reduce dollar positioning “ahead of tomorrow’s Fed meeting,” though he flagged lower oil prices and a sell-off in chip stocks, tied to Chinese competition and scrutiny of US hyper-scaler megadeals, as risks to watch.
Tuesday’s decline in sterling was not driven by UK-specific developments; Turner said the pound was instead caught up in broader dollar strength ahead of the FOMC.
Attention now turns to this week’s Bank of England meeting, which ING said “could serve as a reminder that the bar is high for a rate hike – something which could weigh on sterling..”
The euro’s weakness also reflected dollar dynamics rather than domestic euro-area news, with Turner noting that even this week’s lower energy prices, a boon for Europe, have failed to lift the single currency because “the Fed story is dominating.”
ING sees a break of 1.1360 support opening the door to a retest of the 1.1325 low, and expects to hold gains near 0.8550, having forecast last week that the cross would climb toward 0.88 later this year.
ING’s base case is for further dollar strength into Wednesday’s decision, with , its preferred vehicle for expressing hawkish Fed views, potentially reaching 0.85 in August if the Fed “blow the doors off” with a hike.
A less hawkish Fed statement or a downside surprise in Tuesday’s U.S. data would be needed to reverse the dollar’s bid tone.