Sterling moved slightly higher on Thursday and the euro also inched up as the recent surge in the U.S. dollar began to look stretched to some market participants, even as the U.S. 10-year Treasury yield lingered near multi-year peaks.
GBP/USD rose to 1.3248, a gain of 0.05% on the day, while EUR/USD ticked up to 1.1394, gaining 0.10%, as of 03:45 ET (07:45 GMT). These modest moves were driven primarily by a pause in dollar momentum rather than any new developments on the United Kingdom side.
Underlying the dollar's advance, the 10-year Treasury yield consolidated close to its recent highs after jumping roughly 15 basis points on Wednesday. That move followed stronger-than-expected U.S. business activity readings that rekindled expectations markets may need to price in a longer period of elevated policy rates from the Federal Reserve.
The repricing pushed the DXY dollar index above the 101.0 mark. But not all strategists are convinced the rally is justified by fundamentals. ING FX strategist Francesco Pesole warned that "The dollar rally has accelerated and the move is starting to look stretched," and added that ING expects "a correction in DXY in the coming weeks, with a return to the 100-100.5 area" provided additional data surprises do not arrive.
Market attention is also fixed on a set of Federal Reserve officials scheduled to speak on Thursday - Williams, Barkin, Hammack and Paulson - as investors look for clues on whether an October rate rise remains a live possibility. Pesole emphasised that "any upside surprise in upcoming US data releases can easily prompt markets to fully price in an October Fed hike," signalling ING's caution about declaring a near-term ceiling for the dollar.
Separate technical and cross-market risks were noted in the currency landscape. The article cited USD/JPY as a distinct downside risk channel - a further rally toward 160 could invite Japanese intervention, which in turn could produce broader dollar weakness across currency pairs.
Sterling's slight advance on Thursday, therefore, appeared to be a reflection of dollar softening rather than domestic UK drivers or fresh UK policy signals.
Investors were also monitoring a summit between U.S. President Donald Trump and Chinese President Xi Jinping. Pesole pointed out that any positive headlines from that meeting would likely affect the Australian and New Zealand dollars more noticeably, especially in light of the People’s Bank of China recording a second consecutive weaker yuan fixing.
On the euro front, ING’s short-term fair value framework put EUR/USD into what it described as "stretched undervaluation territory" after the cross fell below the 1.1400 threshold on Wednesday. ING characterised that move as a byproduct of dollar strength rather than a deterioration in eurozone fundamentals.
Indeed, eurozone purchasing managers' indices surprised to the upside, with services activity showing a sharp rise and providing some limited support for the single currency in cross rates.
From a technical perspective, ING highlighted a next notable floor for EUR/USD in the area of the June intraday lows at 1.1325-1.1330. The strategists said they do not currently see the conditions for a break into new lows unless the short-term rate differential widens further in favour of the U.S. dollar.
ING's central scenario projects a EUR/USD convergence toward the 1.1430-1.1450 range, a band the firm regards as more consistent with prevailing rate differentials. The model would only shift markedly lower if there was a sustained widening of U.S.-eurozone short-term yield spreads or a material weakening of eurozone data.
Key takeaways
- Dollar rally shows signs of stretching even as U.S. 10-year yields remain near highs, supporting a pause in dollar strength and modest gains in GBP and EUR.
- Market focus on Federal Reserve speakers and U.S. economic releases could rapidly alter pricing for an October rate move, influencing dollar and cross rates.
- Technical support for EUR/USD sits at the June intraday lows of 1.1325-1.1330; ING targets a reversion toward 1.1430-1.1450 if rate differentials remain stable.
Risks and uncertainties
- Further upside surprises in U.S. data could push markets to fully price an October Fed hike, strengthening the dollar and pressuring currency crosses - a risk for exporters and multi-currency portfolios.
- Sustained widening of U.S.-eurozone short-term yield spreads, or a deterioration in eurozone data, would alter EUR/USD expectations and could drive the pair lower.
- Potential Japanese intervention if USD/JPY extended toward 160 could trigger broader dollar weakness, creating volatility across FX markets and affecting currency-sensitive sectors.