Sterling and the euro found a firmer footing on Thursday as calmer risk appetite across markets allowed both currencies some breathing room. That pause, however, came against the backdrop of a US inflation print that was stronger than many market participants had hoped, keeping the dollar broadly supported.
By 09:08 ET (13:08 GMT), GBP/USD had inched up to 1.3178, a rise of 0.08%, while EUR/USD traded at 1.1353, down 0.05%. The dollar’s advance eased as equities stabilised, but traders viewed the respite as fragile given the US data release.
The Fed’s preferred measure of inflation, the core personal consumption expenditures (PCE) index, rose 0.3% for the month and 3.4% year-on-year, marking its highest annual rate since October 2023. The headline PCE inflation rate came in at 4.1% year-on-year, the strongest reading since April 2023, with energy cost pressures linked to the Iran conflict still filtering through the economy.
Alongside inflation, US consumer spending and personal income both increased by 0.7%, exceeding forecasts and leaving little room for a narrative that would support an imminent dovish shift from the Federal Reserve. ING had highlighted the possibility that a softer 0.2% core monthly print might have eased expectations for further policy tightening; the firmer actual outcome removed that avenue.
ING strategist Francesco Pesole warned that it remains too soon to rule out another leg up for the dollar, noting any renewed risk-off episode - for example, from AI-related fears - could prompt fresh demand for safe-haven assets. Later Fed speakers who typically lean dovish, Michelle Bowman and John Williams, are scheduled to speak and may offer some counterpoint, but the published data provides them limited cover.
In the UK, a reduction in political uncertainty supported sterling modestly. Andy Burnham’s emergence as the frontrunner to lead Labour following Keir Starmer’s resignation was noted by markets, though weak domestic economic data restrained any substantial recovery in cable.
The euro showed signs of stabilisation as equity markets steadied. ING suggested that further calm in stocks could allow EUR/USD to creep back toward 1.140, provided sentiment continues to normalise. A firmer German IFO reading the previous day helped offset disappointing PMIs released on Tuesday, while European Central Bank speakers maintained a more hawkish tone compared with President Christine Lagarde’s remarks earlier in the week.
ING’s baseline view remains that EUR/USD should hold above the 1.130 level, conditional on sentiment remaining on a firmer footing.
Key points
- US core PCE inflation rose 0.3% monthly and 3.4% annually, with headline PCE at 4.1% - both stronger-than-expected prints.
- GBP/USD ticked up modestly while EUR/USD was marginally lower as equity stabilisation provided temporary relief for risk-sensitive currencies.
- Political developments in the UK and mixed German data influenced sterling and the euro, respectively.
Risks and uncertainties
- Renewed risk-off moves - for instance from AI-related market jitters - could lift the dollar again and pressure risk-sensitive currencies; this would affect FX markets and equity sectors.
- Persistently higher US inflation and stronger consumer spending reduce room for dovish Fed messaging, which could impact bond yields and bank balance-sheet interest rate expectations.
- Domestic economic weakness in the UK may limit sterling’s upside despite reduced political uncertainty, with implications for UK-focused financial stocks and exporters.