Overview
Sterling and the euro extended modest advances on Tuesday as currency trading entered a consolidation phase following last week’s sharp moves. The dollar, which surged on U.S. jobs data on Friday, took a breather. At the same time, a stabilisation in technology equities and stronger-than-expected Chinese trade numbers provided some relief to risk sentiment.
Market levels and intraday moves
As of 08:20 ET (12:20 GMT), GBP/USD was trading up 0.44% at 1.3401, while EUR/USD was higher by 0.29% at 1.1572. Both pairs recovered part of the heavy losses recorded on Friday, although the broader dollar bid remained intact.
Drivers of the calm session
The more muted trading tone on Tuesday appears to reflect an absence of fresh, market-moving catalysts rather than a decisive shift in investor sentiment. With the Federal Reserve and the European Central Bank in blackout periods ahead of next week’s meetings, neither central bank is in a position to alter expectations around policy in the immediate term.
Market attention now turns to a slate of U.S. price data. Wednesday’s May consumer price index and Thursday’s producer price index are the next prominent tests for dollar direction and broader risk appetite.
Dollar dynamics and safe-haven demand
ING observes that markets have already tilted toward a less dovish outcome from the Federal Open Market Committee, supporting the dollar on dips. ING highlights the 99.80 area on the Dollar Index as a likely near-term floor before the index attempts another move higher later in the week.
Adding to dollar support, Federal Reserve custody data show a further $71 billion decline in foreign official holdings of U.S. Treasuries since the start of May. That reduction is cited as a potential indicator of FX intervention across Asia, a factor that can exert pressure on the Treasury market and reinforce safe-haven demand for the dollar.
Sterling specifics
For sterling, the partial recovery toward 1.3404 appears driven more by dollar fatigue than by any domestic catalyst. The market continues to expect the Bank of England to pause policy moves over the summer, with current pricing implying roughly 21 basis points of policy tightening at the September meeting.
Sterling’s status as a pro-risk currency means it picks up modest support from Tuesday’s equity stabilisation. Korean chipmakers, which were a focal point of Friday’s sell-off, staged a sharp rebound overnight. That same sensitivity, however, leaves the pound vulnerable should risk appetite deteriorate again.
ING maintains a near-term sterling target of 1.3300 for this week, and warns that renewed dollar momentum could push the pair toward 1.3200.
Euro outlook
EUR/USD is attempting to steady after heavy selling on Friday, with 1.1500 now seen as a key support level. The top of the current near-term trading range is viewed as being in the 1.1555 to 1.1560 area while the bullish dollar theme remains intact.
German industrial production for April came in marginally better than expectations. Nonetheless, ING’s eurozone macro team cautions that activity could weaken in coming months once precautionary inventory accumulation runs its course.
The European Central Bank meeting on Thursday is the principal event risk for the euro. A hawkish tone from the ECB, or a signal of further tightening in September, could provide near-term support for the currency. That scenario, however, will need to clear the hurdle of Wednesday’s U.S. CPI release before it can gain traction.
Implications for markets and sectors
- Foreign exchange markets are in a consolidation phase, with major currency pairs retracing part of last week’s moves.
- Equity markets, especially technology stocks and sectors tied to semiconductors, are influencing risk sentiment and the direction of pro-risk currencies like sterling.
- Fixed income is affected by shifts in foreign official holdings of Treasuries, which in turn support safe-haven dollar demand.