FX Market Update: Dollar Weakness, ECB Rate Hike Bets and Sterling Under Pressure.

• USD – Is under renewed pressure despite several factors supporting the dollar, with markets now focused on the upcoming FOMC minutes for clues on the Fed’s rate path.

• EUR – Is gaining ground, supported by growing expectations of ECB rate hikes as policymakers remain increasingly concerned about persistent inflation.
  

• GBP – Is softer despite higher UK inflation, as markets remain unconvinced that the Bank of England will need to raise rates in the near term.

USD:

The dollar is heading lower again this morning following a period of relatively calm consolidation yesterday. This comes despite several factors that could otherwise support the greenback, including renewed geopolitical tensions, Brent crude rising to a three-week high, a broad surge in long-term yields, and a sharp decline in equities yesterday.

The key focus for markets will be tonight’s release of the FOMC meeting minutes. The previous minutes triggered significant dollar losses late last month as markets began to question whether a rate hike could be on the horizon, despite three Fed members dissenting against the decision to hold rates. The latest minutes should provide further insight into the Committee’s thinking and could determine the dollar’s next move.

---

EUR: 

The euro is continuing to strengthen against the dollar this morning, despite rising energy prices and softer market sentiment. The main support for the single currency is coming from increasingly hawkish expectations surrounding the European Central Bank, with markets now pricing in a greater than 90% probability of a rate hike next month, alongside the possibility of another increase in either December or February.

ECB Chief Economist Philip Lane reinforced these expectations yesterday, expressing concerns that inflation could remain elevated for some time. President Lagarde is also due to speak in Geneva today, meaning markets will be closely watching for any further signals regarding the ECB’s future policy direction. If the ECB maintains this hawkish tone, the euro could retain its recent momentum against both the dollar and sterling.

---

GBP: 

Sterling is showing some weakness this morning despite UK inflation increasing from 2.6% to 2.9%. Core inflation remained at 2.6%, slightly above the 2.5% consensus, but the rise has done little to convince markets that the Bank of England will need to raise interest rates in the near term.

The pound has subsequently ticked lower against the euro, with expectations of further ECB tightening providing additional support for EUR/GBP. Attention now turns to Friday’s UK retail sales and PMI figures, which could provide further insight into the strength of the domestic economy and influence expectations for the Bank of England’s next policy move.

Economic Calendar