Sterling showed little movement on Friday, holding near recent levels even after official data indicated UK GDP growth exceeded forecasts. The euro slipped slightly over the session as investors shifted focus toward an upcoming U.S. inflation report that market participants expect will influence Federal Reserve policy bets.
At 05:10 ET (09:10 GMT), GBP/USD was quoted at 1.3504, down 0.06%. EUR/USD traded at 1.1599, off 0.09%.
Francesco Pesole, an FX strategist at ING, said the dollar has been re-establishing a positive relationship with long-dated U.S. Treasury yields, a development that supports further dollar upside. Pesole pointed to a smaller-than-expected Treasury buyback program and Treasury Secretary Scott Bessent’s unwillingness to counter market moves in the bond market as factors that have helped restore that link.
He also noted broader market flows are reinforcing a defensive tilt into the dollar - including a roughly 15% rally in oil following Gulf tensions and the weakening of the yen - and said the DXY 100 level now appears "less like a stretch target and more like a destination."
Markets have priced in 18 basis points of tightening for the upcoming FOMC meeting heading into Friday’s August CPI release, where consensus forecasts call for a 0.4% month-on-month headline print and 0.2% core. Pesole said that while a softer-than-expected CPI reading could weigh on the dollar, it would probably not be sufficient to push the odds of a September hike below 50%.
Federal Reserve commentary is mixed. Fed Chair Kevin Warsh has set a high data threshold for changing expectations around a rate increase, while Governor Christopher Waller has recently taken a more cautious tone, suggesting a hike may not be necessary if inflation continues to improve.
Despite a renewed selloff in gilts, sterling’s steadiness was not primarily attributable to domestic fundamentals, ING said, with the move in long-term UK yields - 10-year yields approaching 5.5% and 30-year yields near 6% - reflecting higher sensitivity to U.S. Treasuries rather than homegrown fiscal concerns.
UK GDP expanded 0.4% in July, beating expectations and following June’s 0.3% gain. ING highlighted that roughly half of the July increase came from the IT sector, which the firm suggests may be experiencing an uptick in investment tied to AI-related spending. Pesole added that Chancellor Rachel Reeves’s commitment to fiscal discipline appears to be having the intended stabilizing effect, though it limits scope for pro-growth fiscal actions.
On expectations for Bank of England policy, Bank of America anticipates the BoE will keep rates unchanged at 3.75% next week, projecting a 6-3 vote where policymakers Pill, Greene and Mann dissent in favor of a hike. BofA’s view rests on the assessment that market pricing implying nearly four rate increases by next year is excessive.
The euro received some backing from a hawkish European Central Bank move on Thursday, after ECB President Christine Lagarde signaled further tightening could be forthcoming, with October remaining "firmly in play." The ECB also raised its 2028 inflation forecasts to 2.1% for headline measures and 2.3% for core.
ING has reduced conviction in its 1.150 EUR/USD target in light of the ECB’s hawkish shift, though Pesole warned that downside risks for the euro have not vanished ahead of next week’s U.S. Fed decision. ING’s fourth-quarter model targets include GBP/USD at 1.33, EUR/GBP at 0.87, and a 1.150 EUR/USD call. The firm said a confirmed September Fed hike or a material fall in inflation expectations following a soft CPI print would be necessary to alter its dollar-bullish stance.
Key market indicators referenced during the session included modest moves across currency pairs and government bond yields: EUR/USD -0.08%, GBP/USD -0.03%, EUR/GBP +0.07%, the dollar index (DX) +0.08%, Brent crude (LCO) -2.65%, and gilt yield measures showing small declines around 10- and 30-year tenors while U.S. 10-year yields ticked up slightly.
The current mix of stronger-than-expected U.K. GDP, a recovering correlation between the dollar and long-term U.S. yields, recent oil-market strength and diverging central bank rhetoric has left markets positioned for potential Fed tightening, while keeping sterling and the euro under balanced pressure as investors await U.S. inflation data.