Pound Edges Lower as Dollar Stabilizes Above Three-Month Low; Downside Seems Limited

Sterling/dollar traded slightly lower during the Asian session on Thursday, hovering near 1.36047, moving further away from the highest level since May 11 hit in the previous session. The dollar index temporarily steadied above its three-month low, becoming the main factor dragging the pound lower in the short term.

**Stabilizing Dollar Pressures Sterling**

The earlier broad-based dollar weakness had pushed non-USD currencies like sterling higher, but this trend paused during Thursday's Asian session. The dollar index rebounded from recent lows, weighing on sterling/dollar and paring some of its gains. Market reports indicated that sterling's previous rally was more driven by dollar selling than by its own buying momentum, so as the dollar's decline slowed, sterling's upward momentum also waned.

**Dense UK Data Tests Ahead**

This week, the UK is set to release several key economic data points, including inflation, employment, and retail sales. Market expectations broadly point downward, with retail sales month-on-month forecast to contract from the previous 1% to -0.3%, and the August composite PMI flash estimate expected to fall from 52.2 to 51.5. Analysts noted that except for inflation data, consensus forecasts for other indicators are tilted pessimistic, making it difficult for sterling to gain support from domestic UK rate differential buying in the near term.

**Fed Minutes Key to Dollar Narrative**

The dollar-side narrative also influences sterling's trajectory. The Federal Reserve is set to release the minutes of its July FOMC meeting this week, with markets focusing on the stance gap between remaining members and the three dissenters who supported a 25-basis-point rate hike. If the minutes signal more hawkish tones, they could rebuild the rate premium the dollar has recently lost, adding further pressure on sterling/dollar. However, with UK data yet to be released, sterling's downside space may be relatively limited.