Federal Reserve (Fed) minutes from the September meeting showed policymakers still leaning toward another interest-rate increase, strengthening the dollar. Sterling and the euro weakened against the dollar today.
GBP/USD fell 0.20% to 1.3195, while EUR/USD slipped 0.06% to 1.1189.
ING: Fed minutes strengthen fundamental support for the dollar
ING’s global head of markets, Chris Turner, said the Fed minutes had strengthened the fundamental support for the dollar. According to him, high US Treasury yields and rising volatility in markets are limiting fund flows out of the “carry trade” strategy.
Turner expects the dollar to hold its position in the coming months. He forecast that the DXY dollar index could gradually rise to 102.85.
Fed minutes: inflation and rate expectations
According to the Fed meeting minutes, most participants considered it appropriate to raise the target range for the federal funds rate once more by the end of the year.
Inflation concerns and AI investment
The minutes also reflected concerns about high inflation. In addition, participants discussed the rapid growth of investment in artificial intelligence infrastructure and its possible effects on the economy.
Market rate expectations
Markets are currently pricing a 25 basis point increase in December, which would bring the rate to 4.25%, and another 50 basis points of tightening next year. Although ING considers these expectations fairly aggressive, Turner is skeptical that the market will move significantly away from this scenario by the end of the year.
US Treasury auction
A successful US 10-year Treasury auction on Wednesday also showed that demand remains amid high yields.
Why is sterling weakening?
Sterling’s weakness is mainly attributed to dollar strength rather than the UK economy. UK government bond yields have also risen. The 10-year gilt yield rose 3.4 basis points to 5.4833%, while the 30-year yield rose 3 basis points to 6.011%.
BoE remarks and EUR/GBP support
Investors will also focus on remarks by Bank of England (BoE) officials. According to Turner, any signal supporting an interest-rate increase could put additional pressure on EUR/GBP.
ING sees strong support for EUR/GBP at 0.8455–0.8465.
The euro and the French factor
In the euro’s dynamics, the French factor is coming to the fore. The sell-off in French bonds has increased concerns about the country’s budget position. In particular, investor concern has emerged that possible changes in the debt maturity structure could weaken political pressure for reforms.
French budget discussions
According to Turner, EUR/USD is currently largely following the dynamics of French government bonds. ING expects the pair could retreat to the 1.1100–1.1120 zone and find more serious support there.
The expected start of parliamentary discussions on budget consolidation in France on October 13 keeps uncertainty high for the euro’s near-term dynamics.
