Pound and Euro Gain Ground Amid Firm Dollar Support

The British pound saw modest gains on Tuesday, supported by a firm dollar that limited broader currency advances. Sterling edged up 0.08% to $1.3229, while the euro recovered slightly, rising 0.06% to $1.1229. Francesco Pesole, an FX strategist at ING, noted that the dollar remained resilient due to higher global bond yields and the euro’s specific weaknesses.

The U.S. ISM services index dipped to 54.9 in September, slightly below expectations but still indicating expansion. Pesole described the data as 'slightly hawkish' but not enough to change the Federal Reserve’s narrative. Markets anticipate an October hold if the September core CPI report, due on October 14, shows a 0.2% month-on-month increase, with a December rate hike seen as likely.

In the UK, attention is focused on the Bank of England, with several policymakers, including Catherine Mann, set to speak this week. Markets currently price in 21 basis points of tightening in November, but ING believes this hawkish outlook is overstated. The euro remains under pressure, with ING suggesting it could test lower levels if bond market stress continues.

ING also expects EUR/GBP to retest mid-July lows near 0.846, potentially reaching 0.840 before support emerges. The outlook could shift if fiscal concerns in France ease or if Bank of England speakers signal a November rate hike.