Sterling and the Euro fell against a strengthening dollar as traders raised bets that price pressures will force the European Central Bank to hike interest rates on Thursday. Investors have been raising their expectations for a rate hike since the start of the week, with most market participants expecting the ECB to increase its central rates by at least 0.25%. A stronger-than-expected inflation report on Wednesday could further boost expectations for a rate rise, although analysts are divided on the size of the move.
Data showed the eurozone consumer price index (CPI) unexpectedly rose in August, the sixth month of higher CPI readings and the highest rate since mid-2014. The data was a blow to investors who had expected a slight drop, with analysts blaming the fall on the weakening oil price.
The Euro was also lower against the dollar after comments from a Dutch central bank official suggested investors were overestimating the likelihood of a resumption in the Fed’s tightening cycle. Traders also took a cautious approach ahead of a critical U.S. inflation report on Wednesday. Economists expect the U.S. consumer price index (CPI) to show that annualized core inflation remained near the Fed’s 2% target for a third month.
In the pound, market sentiment continued to be hurt by proposals for U.K. taxpayers to guarantee mortgages and support the lending market, which some fear could fuel higher inflation. The pound was down 0.3% at $1.2471, close to a three-month low.
Sterling remained under pressure even after the Treasury and the Bank of England attempted to calm fears of a higher inflationary impact from the government’s spending plans. The pound slumped as low as $1.035, its weakest level against the dollar on record, as investors reacted to the plans.
As a result, J.P. Morgan Research said the pound could remain an “underperformer” versus the dollar for a while, potentially pushing it below parity with the greenback. “The new coalition government’s policy signals a clear intention to raise household incomes through reduced energy prices, prudent fiscal policy, or less pressure on the Bank of England to hike interest rates,” it added.
The dollar index, which tracks the currency against six peers, including the yen, Euro, and sterling, held firm, though moves were subdued as traders awaited August’s U.S. consumer price index (CPI) reading. The release comes just a week after the Federal Reserve raised interest rates for a third time this year. The Fed has indicated it will slow its rate-hiking pace in the coming months, with some traders predicting a rate hike could be delayed until early 2023.
European equity futures slipped, with the Euro Stoxx 600 Index down 0.4% at midday and German contracts down 1.3%. U.S. equity futures were flat. The tech-heavy Nasdaq 100 futures were down 0.4%. Crude prices rose, with the benchmark Brent crude contract up 0.9% to $47.37 per barrel.