Pound Dips as Euro Weakness Boosts Dollar

The pound sterling (GBP) edged slightly lower on Monday, as the euro dropped toward 52-week lows and the dollar extended its gains. Sterling was trading at $1.3235, down 0.04%, while the euro fell 0.43% to $1.1204. The dollar's strength is being driven by expectations that U.S. interest rates will remain higher for longer than those of other major central banks.

Chris Turner, global head of markets at ING, noted that the euro's sell-off is a key factor propelling the dollar higher. The euro makes up 58% of the dollar index basket, making its weakness particularly impactful. Turner highlighted 102.85 as the next upside target for the dollar, citing resilient expectations for Fed monetary policy tightening compared to overseas central banks, especially the European Central Bank (ECB).

The pound's movement is not driven by UK fundamentals but rather by dollar strength and euro weakness. Sterling gained against the euro, with Turner pointing to large declines in EUR/CHF as an indicator of a growing risk premium in the euro. The euro is under pressure from French fiscal worries following last week's sell-off in French debt, with investors hesitant to engage with French debt for the time being.

Attention is now focused on the French budget submission and comments from the ECB at a conference in Frankfurt. The ECB must balance tough talk on inflation with potential intervention should the French sell-off worsen. ING maintains its target of 1.1100/1.1120 for the euro, with a risk of further extension toward 1.10. The cyclical outlook appears negative for the coming months, though a surprise positive could come from U.S. midterm election results prompting a policy response from the White House.