Sterling moved slightly higher on Friday while the euro registered a modest uptick as a wider sell-off in global government bonds sustained a risk-off backdrop and helped the dollar maintain recent advances.
Currency moves as of 05:00 ET (09:00 GMT) showed GBP/USD up 0.09% at 1.3233 and EUR/USD up 0.12% at 1.1392. These changes occurred amid shifting sentiment driven by higher back-end yields, which traders said underpinned the dollar even as some valuations now look extended relative to short-term fundamentals, an assessment attributed to ING.
Energy markets remained an important supporting element for the dollar. Oil prices stayed elevated after the United Nations General Assembly summit failed to produce optimism around a political resolution in the Gulf. A brief corrective rally in risk assets following reports of talks between the U.S. and Iran on reopening the Strait of Hormuz was reversed within hours, reflecting market scepticism that any de-escalation is imminent. As Francesco Pesole, FX strategist at ING, put it: "We remain cautious about calling the end of this USD rally." He added: "We may see $110/bbl for Brent before the end of the month, with the dollar finding fresh support from the energy story."
Market pricing continued to reflect an aggressive Federal Reserve tightening path. The 2-year SOFR rate rose by nearly 20 basis points over the previous 48 hours. Traders pushed the chance of a rate increase in October to 18 basis points, with two full hikes priced in by January and nearly four by July 2027 - shifts that reflect the cumulative influence of hawkish Fed commentary on rate expectations.
Analysts noted that near-term directional risks for the dollar hinge on incoming U.S. economic data. An upside surprise in U.S. releases was identified as the most likely trigger for another leg higher in the greenback.
Sterling's modest advance did not reflect any material U.K.-specific economic or political developments. Instead, the pound's movement was determined by global risk appetite and the energy-driven dynamic that has been supporting dollar demand across asset classes.
The euro faced additional headwinds. French 10-year yields were trading 110 basis points above German bunds, and political uncertainty around the French budget persisted despite reports that Marine Le Pen might support the proposal. ING's Pesole said that euro-positive factors such as recent signs of economic resilience - for example, yesterday's Ifo index mirroring strong PMIs - were being at least partly offset by wider eurozone sovereign spreads. He noted that this narrative is unlikely to benefit the euro in the current market environment.
ING flagged 1.1320-1.1330 as the next key support zone for EUR/USD, warning that this range could be tested quickly either by another surge in oil prices or by a U.S. data upside surprise. "We do not think new lows are imminent, but downside risks persist," Pesole said. He added that a convincing break below 1.1320 would deepen ING's near-term bearish view, and that only a meaningful Middle East de-escalation or a dovish pivot in Fed guidance would materially alter that outlook.
With markets still sensitive to developments in energy, geopolitics and U.S. macro data, FX participants are watching price action for signs that the dollar rally has momentum or is vulnerable to correction. For now, elevated yields and oil prices appear to be the principal forces keeping the dollar supported and placing a cap on potential gains in major crosses including sterling and the euro.