Pound Edges Higher Amid Dollar Rally Fears

The Pound Sterling has edged higher on Monday as traders weigh whether the recent dollar rally can last. The dollar's momentum is being tested ahead of a week packed with U.S. jobs and inflation data.

ING FX strategist Francesco Pesole noted that 'data could re-emerge as a primary driver for the dollar this week.' He also stated that 'the dollar has been looking a bit expensive across G10 according to our short-term valuation models.'

Pesole predicted that dollar bulls may hold around 101.0 for now, but there's a risk of a pullback to 100.50. Markets currently price 16 basis points of tightening for the Oct. 28 Fed meeting.

The pound's gain appears to be driven by the dollar rather than UK-specific factors. The Bank of England is expected to hike rates, with markets pricing in more than four hikes over the coming year. However, ING's rates strategist Michiel Tukker believes that markets have turned too hawkish and sees scope for rate cuts toward 3.25% from 3.75% as inflation converges to target by mid-2027.