Sterling traded lower against the U.S. dollar on Tuesday, while the euro posted a small gain, as a firmer dollar drew backing from improved AI-related sentiment and positioning ahead of a busy policy and fiscal calendar.
By 05:57 ET (09:57 GMT) sterling was down 0.19% at $1.3317, while the euro was trading up 0.27% at $1.1143.
Market participants said a combination of steadier sentiment around artificial intelligence developments and the expectation of a persistently hawkish Federal Reserve underpinned the dollar.
"The dollar has found good support early this week, as stabilising AI-related sentiment has allowed markets to reconnect with the broader supportive backdrop of a hawkish Federal Reserve and high energy prices," said Francesco Pesole, FX strategist at ING.
ING also highlighted the effect of recent comments from Fed officials. In the note, the firm said that Fed Chair Kevin Warsh’s reiteration of inflation commitments helps to establish a structural floor for the dollar, characterising it as a hawkish signal.
Investors were looking ahead to the Federal Reserve decision on Wednesday and monitoring a raft of U.S. economic releases due on Tuesday, including Conference Board consumer confidence, durable goods orders, new home sales and the Richmond Fed index. ING’s expectation for Conference Board consumer confidence was 81.5, compared with a consensus of 81.0 and September’s 81.9.
Pesole added that a surprise in the consumer confidence print was unlikely to alter the Fed’s overall tone, though he noted that recent pricing for further policy tightening had shown some fragility. He also flagged that Israeli election results could influence oil and the dollar.
HSBC said movements in sterling reflected portfolio adjustments ahead of the Fed, with short-dollar positions being trimmed. The bank noted that the pound was underperforming most major currencies on the day, gaining only against the yen and showing the weakest performance versus the New Zealand dollar.
The UK Budget, scheduled for Wednesday, added another layer of potential volatility for the pound. Market participants expect Chancellor John Healey to deliver a relatively low-key statement, leaving little room for fiscal surprises that would be materially negative. Reports over the weekend suggested Healey may add roughly 20 billion in investment over five years, which would remove one notable downside risk to the currency.
Markets are also pricing in a 25-basis-point Bank of England rate increase to 4% in November.
ING provided an assessment of EUR/USD, calling the pair 1.0-1.5% undervalued overall, attributing much of that mispricing to conditions in France. ING said that French spreads would need to widen "quite significantly" from 153 basis points to trigger a sizeable decline in the euro. The bank expects the European Central Bank to hold at its meeting on Thursday and described expectations of a large dovish shift as unjustified.
"For now, we don’t see it breaking below" the $1.110 level hit on Oct. 14, Pesole said.
HSBC put immediate resistance for EUR/USD at $1.1257.
ING did not provide a sterling target in the note distributed. LSEG consensus, cited by HSBC, expected GBP/USD at $1.33 and EUR/USD at $1.14 in the fourth quarter. HSBC placed GBP/USD support at $1.3175 and resistance at $1.3461.
Analysts outlined several scenarios that could alter current pricing across currencies. A lower-than-expected consumer confidence reading, a less hawkish Fed decision than priced in, or a strong opposition performance in Israel could weaken the dollar. Conversely, a surprising Budget outcome in the U.K. could unsettle sterling’s current valuation.
ING noted that a move below $1.110 for EUR/USD, or a notable widening in French spreads beyond current levels, would call its euro view into question.
Overall, currency markets remained attentive to the twin catalysts of central bank guidance and fiscal announcements, with participants trimming and rebalancing positions as they awaited fresh information that could reshape near-term price dynamics.