Investing.com — Sterling traded little changed on Friday while the euro edged higher, as a week of hotter U.S. inflation and more aggressive Federal Reserve pricing left the dollar near its strongest levels of the year.
Sterling was up 0.04% against the dollar at $1.3241, while the euro rose 0.07% to $1.1063, as of 04:05 ET (09:05 GMT).
The dollar has rallied sharply this week, with short-dated U.S. yields close to 40 basis points higher since Tuesday, according to ING. Markets now price back-to-back Fed hikes in December and January and a full 85bp of tightening from here.
“That’s beginning to look a lot more like a cycle than the kind of modest adjustment we recently presented in our house baseline view,” Chris Turner, global head of markets at ING, wrote on Friday. The dollar index hit a new high for the year, and Turner sees resistance at 104.60, about 1.5% above current levels.
Fed Governor Christopher Waller on Tuesday raised the prospect of a 50bp hike in December, a hawkish signal that markets have taken seriously. ING notes that some Fed officials are now describing conditions as a demand shock rather than a supply shock.
“It is hard to see what is going to change this hawkish Fed/dollar-positive mindset in the next few weeks,” Turner said. He added that only a big U.S. tech sell-off was likely to dent short-dated yields.
October producer prices are due later on Friday, with markets watching healthcare, airfares and software components that feed into core PCE. That data is due on Nov. 25. A third straight 0.3% monthly rise would, ING says, increase expectations of a 50bp hike.
ING strategists Turner and Francesco Pesole see GBP/USD still trapped in the middle of a 1.32-1.37 range. They said any break higher would more likely come from surprise dollar weakness, as the Bank of England tightening cycle already looks fully priced.
ING flagged one domestic wild card: the risk that Prime Minister Andy Burnham calls early elections next year, with sterling potentially reacting positively if Labour put another Europe referendum in its manifesto. But the bank noted that renegotiating the fiscal rule could cut the other way.
