Sterling traded flat on Thursday while the euro stayed near recent levels as the U.S. dollar’s broad post-Fed advance lost momentum ahead of the Bank of England’s rate decision.
GBP/USD changed little at 1.3381, while EUR/USD was up 0.03% at 1.1468, according to data at 04:12 ET (08:12 GMT).
The dollar had surged across markets on Wednesday after the Federal Reserve implemented a 25 basis-point increase and presented a hawkish dot plot. "The dollar rallied across the board, with DXY up 0.6% and at a two-month high," said Francesco Pesole, FX strategist at ING.
"We think risks are more balanced for USD now that the monetary policy boost has been absorbed, but they remain tilted to the upside in the near term," Pesole added.
Fed Chair Kevin Warsh offered limited fresh signals in the press conference but reiterated a commitment to price stability, describing the action as the Fed removing a "dose of accommodation." Of 18 FOMC members, 12 anticipate at least one more hike this year and four foresee two further increases. Two-year U.S. dollar swap rates jumped 10-12 basis points following the decision.
Markets are pricing in 13 basis points of tightening for October and 32 basis points by December, with traders focused on upcoming inflation and labour data for confirmation on the path signalled by the Fed. Pesole noted that the dollar’s direction remains "heavily reliant on a de-escalation in the Gulf," with oil prices acting as a key swing factor.
Sterling’s movement on Thursday was driven primarily by dollar dynamics rather than domestic U.K. developments. The Bank of England is expected to leave its policy rate at 3.75% later on Thursday, with the vote split anticipated at 6-3, matching consensus. Current pricing implies only 2 basis points of tightening for the meeting itself.
"We see little evidence that the six doves are moving in that direction," Pesole said, pointing to the importance of whether Governor Andrew Bailey expresses any discomfort with how markets are pricing future policy.
ING expects that any dovish tilt from the BoE would pressure sterling against both the dollar and the euro and projects EUR/GBP at 0.87 by year-end.
For the euro, ING’s short-term fair-value model has declined to 1.150, down about 1% over the past week, as higher oil prices have offset support stemming from the European Central Bank’s relatively hawkish tone. "The two-year swap rate differential widened by 15bp to the widest since July," Pesole observed, adding that there is "no strong technical support in sight before the 1.132-1.135 area," which corresponds to the summer low.
ING’s baseline anticipates the dollar stabilising around current ranges before easing toward year-end, conditional on a cooling of tensions in the Gulf. The firm’s forward targets include EUR/GBP at 0.87 by year-end - compared with a more constructive 0.85 view from UBS - and support for USD/JPY above 155, with stabilisation near 156-157.
According to ING, a sustained drop in oil prices or a de-escalation of the U.S.-Iran conflict would be required to materially alter the dollar-bullish bias. In the absence of such developments, both sterling and the euro face near-term downside risk.