The British pound traded higher on Friday, while the euro also strengthened as investors reduced expectations for further Federal Reserve interest rate increases.
The latest U.S. consumer inflation report leaned in a dovish direction. However, the data did not provide a clear signal about the Fed’s next policy move.
GBP/USD rose 0.26% to 1.3521, while EUR/USD gained 0.21% to 1.1553 as of 04:45 ET, or 08:45 GMT.
Fed Rate Expectations Pressure the Dollar
ING FX strategist Francesco Pesole said the bank continues to favor further weakness in the U.S. dollar.
According to ING, markets may still be pricing in too much monetary tightening from the Federal Reserve.
However, foreign exchange volatility remains relatively subdued following the CPI report. Thin summer trading conditions could keep major currency pairs within relatively narrow ranges over the next couple of weeks.
Fed Comments Could Drive the Next Forex Move
Comments from Federal Reserve officials are likely to become an important catalyst for currency markets in the near term.
Attention is increasingly turning toward the Jackson Hole Symposium later in August, where investors will look for clearer signals about the Fed’s interest rate outlook.
Recent comments from policymakers have provided mixed signals.
Fed official Beth Hammack, who supported a rate increase, continued to argue in favor of tighter monetary policy. Meanwhile, Tom Barkin questioned whether additional rate hikes are necessary.
Traders will now watch other Fed officials closely for signs that policymakers are becoming less hawkish.
U.S. Retail Sales and Consumer Sentiment in Focus
Friday’s U.S. economic calendar could provide further direction for the dollar.
July retail sales are expected to increase by a modest 0.1% month over month. Investors will also monitor the University of Michigan consumer sentiment survey, which is expected to remain broadly unchanged.
Any significant surprise could influence expectations for future Federal Reserve policy and create fresh volatility in GBP/USD and EUR/USD.
Pound Strength Driven Mainly by Dollar Weakness
The latest rise in pound sterling is not primarily being driven by developments in the UK economy.
Instead, GBP/USD is benefiting from broader weakness in the U.S. dollar as investors reconsider the likelihood of further Fed tightening.
There were no major UK economic reports or monetary policy announcements scheduled to provide an independent catalyst for sterling during Friday’s session.
EUR/USD Approaches Key 1.1600 Level
The euro also benefited from dollar weakness.
ING estimates that the short-term fair value for EUR/USD is between 1.1600 and 1.1650. The outlook is being influenced largely by changes in two-year swap rate differentials.
This supports ING’s positive view on EUR/USD. However, the bank remains cautious about whether the pair can move decisively above 1.1600 in the coming sessions.
A stronger breakout may require Federal Reserve officials to adopt a more dovish tone.
Euro Finds Support Near 1.1500
ING sees strengthening technical support for EUR/USD around the 1.1500 level.
The eurozone is also scheduled to release its second estimate of second-quarter GDP on Friday. Economists are not expecting a significant revision from the preliminary reading of 0.4% quarterly growth.
For now, ING expects EUR/USD to remain just below 1.1600 unless the outlook for U.S. monetary policy shifts more clearly toward a dovish direction.
Such a change could emerge around the Jackson Hole gathering later this month. Until then, euro buyers may focus on defending the 1.1500 support area rather than pushing the currency pair toward fresh highs.
