Pound Gains Limited by Strong Dollar and Bond Yields

The British pound showed modest gains on Tuesday, though its upside remained limited by a stronger dollar supported by rising global bond yields. As of 04:15 ET, sterling rose 0.08% against the dollar to $1.3229, while the euro climbed 0.06% to $1.1229. Francesco Pesole, an FX strategist at ING, noted that the dollar continued to find support early in the week, citing the euro's weakness and higher global bond yields. He added that strong equities likely capped dollar gains, though the domestic environment still favored the greenback.

U.S. economic data showed the ISM services index easing to 54.9 in September from 55.4, slightly below expectations but still indicating expansion. Pesole described this as 'slightly hawkish news' due to its impact on jobs and prices, though not enough to change the Federal Reserve's narrative. ING expects markets to accept an October hold if September core CPI, due on October 14, shows a 0.2% month-on-month increase, with a December rate hike as their base case.

The UK's main economic release for the day was the September construction PMI, but attention was focused on the Bank of England. Catherine Mann, who voted for rate hikes in July and September, is set to speak, along with other key speakers later in the week. Markets anticipate 21 basis points of tightening next month, with ING considering this outlook 'far too hawkishly priced' due to elevated oil prices.

The euro started the week at the bottom of the G10 scorecard, with turbulence adding fiscal risk and reducing ECB rate-hike expectations. ING forecasts EUR/USD could test 1.110 or even 1.100 if bond market stress worsens, and sees EUR/GBP retesting mid-July lows near 0.846, with 0.840 possible before clear support emerges. The outlook could change if French fiscal concerns ease or if Bank of England speakers signal a November hike.