The British pound and the euro both weakened on Wednesday as the U.S. dollar strengthened, driven by rising expectations of a Federal Reserve interest rate hike and hotter-than-expected inflation data. Sterling fell 0.16% to $1.3319, while the euro dropped 0.21% to $1.1142 as of 04:20 ET (09:20 GMT). Analysts at ING noted that the bearish flattening of the U.S. yield curve typically benefits the dollar against currencies like the pound.
Chris Turner, global head of markets at ING, predicted that the dollar would remain strong and could soon retest resistance levels around 102.85/103.00. Federal Reserve Governor Chris Waller reinforced hawkish sentiment, suggesting a 25 basis point rate hike in December, with the possibility of a 50 basis point move if inflation remained elevated. Markets now fully price in a 25 basis point hike, with the next key data point being Friday’s October PPI report.
Bank of England Deputy Governor Clare Lombardelli, who voted for a recent rate increase to 4%, hinted that a December rate hike was still on the table but emphasized the need for more data. Meanwhile, ING’s Michiel Tukker highlighted that a core CPI reading of 0.3% monthly could annualize to a yearly inflation figure well above 3%, supporting the case for tighter monetary policy.
For the euro, ING’s Turner identified 1.1110 as a key support level for speculative positions, though he cautioned that the case for a bounce was weak. The firm expects the European Central Bank to raise rates to 2.75% in December but sees limited scope for further hikes. Turner anticipates EUR/USD could trade near the lower end of a 1.10-1.15 range by year-end, barring softer U.S. price data or a longer ECB tightening cycle.