Sterling edged up on Wednesday in a market environment characterised by a softer dollar and caution ahead of the U.S. September inflation release. The pound was trading at 1.3264 against the dollar, up 0.11%, while the euro was at 1.1196, down 0.03%, as of 05:10 ET (09:10 GMT).
Analysts at ING pointed to a weak session for the dollar on Tuesday, which they attributed to a combination of stretched positioning and a short-term overvaluation coinciding with a rebound in global bond markets. Francesco Pesole, FX strategist at ING, noted that these factors were behind the dollar’s weakness but cautioned that a strong U.S. inflation print could re-establish dollar support.
"For this reason, we expect some dollar re-strengthening today," Pesole wrote, adding that a hot print "can reinforce expectations of further tightening down the road and, by extension, the dollar’s floor."
Market consensus ahead of the U.S. CPI release is for headline consumer prices to rise 0.6% month-on-month and for core inflation to increase 0.2% month-on-month. ING’s macro team has slightly higher expectations, forecasting headline at 0.7% and core at 0.3% month-on-month.
Compiled forecasts also show annual U.S. inflation accelerating to 3.6% from 3.4%, with energy identified as the principal driver and gasoline expected to be up by more than 7%.
Comments from U.S. central bank officials also featured in market positioning. New York Fed President John Williams, whom market observers consider a dovish-leaning voice, said he still expects another rate hike this year but sees signs that inflation will slow and does not anticipate further tightening in 2027, aligning with the median of the Fed's Dot Plot projections.
Pesole highlighted that Williams’ explicit pushback against market expectations for three more hikes by June "has been uncommon." Current market pricing assigns roughly a 20% probability to an October rate increase. Pesole added that for pricing to return above 50% for an October move, the U.S. CPI print would likely need to show headline inflation near 1.0% month-on-month and/or core inflation around 0.4% month-on-month.
The pound’s modest advance appeared to be driven more by dollar dynamics than by fresh UK economic data. Still, commentary from the Bank of England continued to shape expectations about the trajectory of U.K. interest rates. BoE Chief Economist Huw Pill, who backed a rate increase in September, expressed reservations about market assumptions of four 25 basis-point hikes over the next year.
He told a Citi event in Bangkok, "Is four hikes appropriate over the next year?" and described himself as "a little bit more sceptical" of that market pricing.
Pill also warned that "a risk of some self-sustaining momentum" in inflation had become clearer given the Gulf conflict. Governor Andrew Bailey added on Tuesday that "the longer this goes on, the harder it gets." Market pricing continues to view a November hike as highly likely.
ING characterised Pill’s remarks as hawkish on the need to act but cautious about the speed the market is pricing - a nuance that altered earlier commentary which had suggested no immediate UK catalyst for sterling moves.
On the euro, Pesole observed that EUR/USD had "climbed back to the 1.120 handle, entirely due to a softer dollar." He cautioned that the euro was not regaining momentum against other currencies, which he said indicated continued French risk weighing on the currency. Notably, the France-Germany 10-year yield spread tightened by about 5 basis points to 137 basis points on Tuesday.
ING's models view EUR/USD as cheap, and the firm has a one-month target of 1.13. However, it warned that the pair could still retest the 1.1150-1.1160 area in the coming days. The bank added that a U.S. CPI reading near a 1.0% headline or a 0.4% core would likely push October tightening odds above 50% and extend dollar strength, whereas a softer U.S. print or easing of French fiscal strains would support the 1.13 target.
Markets remained poised ahead of the inflation data, with currency traders and fixed income investors watching U.S. CPI prints, Fed messaging, and geopolitical developments that could influence energy prices and broader inflation dynamics.