Investing.com — Sterling traded lower on Friday while the euro also dipped, as hawkish Federal Reserve commentary anchored the dollar and short-term implied volatility touched its lowest level since 2021, a calm that analysts warned carries its own dangers.
At 07:35 ET (11:35 GMT), to $1.3441, while the euro eased 0.09% to $1.1433.
DXY-weighted one-month implied volatility has broken below levels that capped the January, May and June lows, “remarkable given the serious military re-escalation between the US and Iran and the prospect of a new Federal Reserve tightening cycle,” said Francesco Pesole, FX strategist at ING.
He attributed the suppressed readings partly to AI-fuelled equity resilience “anchoring currencies and helping sustain a selfreinforcing low-volatility, carry-trade environment,” but cautioned that risks for both FX volatility and the dollar are “clearly skewed to the upside.”
Fed officials Lorie Logan and Jeffrey Schmid delivered hawkish remarks on Thursday. Markets on Friday awaited comments from Fed dove Philip Jefferson, as well as University of Michigan consumer sentiment surveys, industrial production and housing starts data, readings that could sharpen the Fed’s rate outlook.
Market pricing for 35 basis points of tightening by year-end looks “way too aggressive,” Pesole said, with ING’s base call remaining a hold.
Sterling’s retreat appeared driven primarily by dollar-side forces rather than any deterioration in UK fundamentals.
CFTC data show GBP positioning remains heavily short, meaning short-covering could extend the pound’s recent gains once near-term dollar pressure fades, noted Constantin Bolz, strategist at UBS Switzerland.
A domestic wildcard loomed regardless: incoming Prime Minister Andy Burnham, due to take office next week, was scheduled to speak on Friday, and Pesole cautioned that approaching a government transition with GBP displaying short-term overvaluation “is a risk for the pound.”
, at 0.850, remained roughly 1.5% undervalued by ING’s short-term fair value model, with Pesole targeting a return to 0.870 by end of summer.
The euro found little fresh directional impulse. ING sees rangebound near current levels, with “little in place to drive either a break above 1.150 or a retest of sub-1.135 levels,” Pesole wrote.
Next week’s ECB meeting is expected to deliver a consensus hold, though ING noted that rising oil prices have “reopened the door to a surprise hike,” with a final hawk-dove showdown possible before the summer break; ING’s base case for a move remains September.
For UBS, the medium-term GBP view stays constructive, Bolz targets GBPCHF at 1.11 by September, underpinned by a 4.2% carry advantage.
The scenario that would force a rethink: renewed risk aversion, a dovish Bank of England pivot, or a sharp equity sell-off.
SOURCE LINK : Sterling today: Pound slips against strong dollar as Fed tightening bets hold firm By Investing.com
