Sterling eased on Wednesday while the euro remained largely unchanged, as the U.S. dollar found modest support following a widespread retreat in the previous session. Market prices showed GBP/USD down 0.05% at 1.3534, while EUR/USD was flat at 1.1625 at 06:05 ET (10:05 GMT).
Observers say the main theme in currency markets has been the dollar's inability to build on what many see as supportive fundamentals. Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING, described the dollar's recent movement as puzzling, saying: "Dollar price action this week has been a little disappointing/confusing."
Turner underscored several factors that, in principle, should favour the greenback but have not produced a decisive rally. He noted that "Higher energy prices due to an escalation in the Gulf will direct more trade flows towards the US at the expense of Europe and Asia," a dynamic that typically benefits the dollar, but which has not yet translated into stronger dollar performance.
Another element Turner highlighted is the role of USD/JPY. He pointed to a fragile USD/JPY as a drag on the dollar and cited positioning among hedge funds: "global macro hedge funds position for a downside break of 150 over the coming months." He also flagged the tight negative correlation between elevated global equities and the dollar as an additional headwind.
Looking ahead on the U.S. macro calendar, market participants are focused on Friday's August CPI report. ING regards that release as pivotal, calling it "the final piece of the puzzle for the Fed’s policy decision next week," and the bank is forecasting a 25 basis-point rate hike by the Federal Reserve.
On the dollar index, Turner said ING does not currently see "a strong case for DXY to immediately break support at 98.55/65," but cautioned that if a break occurs it would likely be driven by USD/JPY and could pull the index down toward 98.00.
For sterling, there were no notable domestic data or policy catalysts in the session; the pound's slight drift appeared to be driven mainly by broader dollar positioning rather than any UK-specific developments.
The euro's position was described by Turner as roughly mid-range: "sitting approximately in the middle of its range seen since April" near the 1.1600 area. He added that a pronounced deterioration in the euro's terms of trade "would be an important factor weighing on EUR/USD this week," but that the pair's resilience at present "probably raises more questions for the dollar" than for the euro.
With the European Central Bank expected to act on Thursday, ING is "looking for a dovish hike - or at least a hike which does not support the additional 50bp of tightening priced in." Turner said ING sees no obvious case for EUR/USD to clear resistance at 1.1640/45, though he acknowledged that a break above that level could open the door to 1.1675/80.
ING's base case for EUR/USD remains a target of 1.15 by the end of September, conditional on the anticipated Fed rate hike materialising. Turner noted that two principal developments could change the bank's dollar outlook in either direction: a more hawkish-than-expected Fed outcome or a decisive USD/JPY breakdown through the 150 level.
In short, the session featured modest moves in sterling and a flat euro while market attention centers on U.S. inflation data, the Fed decision next week, the ECB's near-term action, and fragile positioning in USD/JPY, all of which market participants expect to be influential for currency trends in the coming days.