Investing.com — Sterling traded higher on Monday while the euro also firmed, as the dollar eased on a 2-3% drop in oil prices after reports that U.S. President Donald Trump wants diplomacy with Iran to run its course.
Sterling rose 0.39% against the dollar to $1.3440, while the euro gained 0.65% to $1.1233, as of 04:17 ET (09:17 GMT).
The oil move reversed Friday’s positioning, when some traders bet on a fresh attack over the weekend.
“Expect DXY to continue trading around 102.00, and we do not see a strong case for a correction lower,” said Chris Turner, global head of markets at ING. Betting sites give Democrats a 70-72% chance of taking both chambers in this week’s midterms.
“One could make the case that the dollar should come lower on such an outcome,” Turner said, though he called many of those views “speculative.”
The Fed outlook is hawkish. ING notes U.S. third-quarter growth of 3.4% annualised, inflation above target for a sixth year and a Fed “readying to tighten again.”
ISM surveys land this week, with Friday’s October payrolls expected to show a modest rebound after a soft September.
Turner doubts the jobs data “really moves the needle on the Fed tightening story.” Apple reports after the close, and last month’s 9% Nasdaq sell-off has softened short-dated U.S. rates.
The pound’s gain owes more to the dollar than to UK fundamentals. A 25 basis point Bank of England hike to 4% on Thursday is fully priced, and ING expects a 7-2 vote.
“This all leaves the Bank in a strange situation: hiking not because the economic data is telling it to, but because of the risks presented by sharply higher energy prices,” said James Smith, UK economist at ING.
Speculators remain short sterling. EUR/GBP has fallen nearly 4% in just over a month, but Turner said it is “too early to expect a significant low.”
The euro is under a separate cloud. The ECB held rates in October, and Fitch cut its outlook on France to negative late Friday, with another review due by end-February.
“We suspect there will be more EUR/USD sellers in the 1.1200/1250 area should it make it that far,” Turner said.
The euro is now inside that zone. HSBC puts EUR/USD support at 1.1084 and resistance at 1.1250.
