USD: USD gains in October as markets weigh Fed’s ‘two and done’ path
The dollar’s recent resilience is difficult to ignore. Despite back-to-back rate cuts by the Federal Reserve in September and October, many market participants had expected this to trigger a more pronounced weakening of the USD. Yet, the DXY has remained range-bound, consolidating since late May, a sign that the dollar’s underlying support remains intact. In October, the US DXY index was up 2%, its first monthly gain since July.
Since August, we’ve argued that the threshold for sustained dollar weakness has risen. This year’s depreciation was driven more by currency hedging and portfolio repositioning than by a broad-based divestment from US assets. While many still lean toward further dollar softness into year-end, several factors complicate that narrative. These include the resilience of US economic growth (Atlanta Fed’s nowcast model points to a healthy 3.9% Q3 growth), the structural support from persistent fiscal deficits, a cautious Fed, and a market that has already priced in much of the anticipated easing. As a result, the dollar’s trajectory is increasingly tied to actual economic outcomes rather than speculative expectations of dovish policy.
Monetary policy remains in a bit of a holding pattern. While another rate cut seems increasingly probable, the lack of September’s Non-Farm Payroll data has left FOMC officials hesitant to make firm commitments. There’s a general sense that the labor market is losing momentum, but without concrete figures, policymakers are understandably taking a cautious approach. In fact, last Friday, two Fed officials publicly opposed the recent rate cut, citing persistent inflation concerns. Kansas City Fed President Jeff Schmid, who voted to hold rates steady, stated: “By my assessment, the labor market is largely in balance, the economy shows continued momentum, and inflation remains too high.”
Complicating matters further is the ongoing government shutdown, now nearing a historic milestone. It’s approaching the longest in US history (35 days), and its continuation has disrupted key economic data releases. In the absence of official labor statistics, market participants will turn to alternative indicators this week, including Wednesday’s ADP employment report. While PMI and ISM data will also be released, their market impact is expected to be limited.
In this context, the dollar’s resilience could extend into November. If alternative labor market data shows signs of strength, it may further bolster the USD, especially as speculation around the Fed’s next move intensifies. But can this resilience translate into a breakout from this five-month sideways trend? Could the news of a government shutdown resolution be the trigger, or the long-awaited payroll data from the past two months? Or perhaps a dose of bad news from global peers? Fresh data this week may not provide enough of a catalyst, and dollar bulls might need to remain patient. Technically, the charts point to a test of the five-month upper band, but a strong breakout above 100 may still require a more compelling fundamental driver. With the government shutdown potentially becoming the longest on record, the interplay between fiscal uncertainty and monetary policy expectations will be key in shaping the dollar’s near-term trajectory.
GBP: Sterling on shacky grounds
Sterling enters the week on fragile footing ahead of Thursday’s BoE meeting. Markets are pricing in just 7bps of easing for this week and 17bps by year-end – leaving room for dovish surprises, especially after September’s softer inflation print gave policymakers more room to pivot amid a persistently soft labour market and stagnant growth.
Technically, GBP/USD looks increasingly vulnerable. The 1.30 level – unseen since April – is now in play, with the pair having broken below its 200-day moving average for the first time since sterling’s H1 rally against the dollar. The setup leaves the pair unanchored, emboldening bears to engage more forcefully.
Looking into December, the Budget may offer a brief reprieve if fiscal discipline is perceived as credible – recent declines in long-term yields suggest rising expectations of restrictive policy manoeuvres. But the underlying “fix-the-fiscal-hole” policy mix – whether tax hikes or spending restraint – will likely reinforce the need for further BoE easing to support growth. That’s a structurally bearish setup for sterling, whichever bearish force ultimately dominates.
EUR: EUR may find its footing into year-end
The euro’s recent drift masks a deeper story: while EUR/USD remains at the mercy of US data and Fed repricing, the ECB’s quiet confidence and a modest growth surprise in France suggest the eurozone isn’t as fragile as it looks. With the bar for ECB easing high and the Fed turning cautious, the euro may yet find its footing into year-end.
The euro ended last month around 1.5% lower against the US dollar but gained nearly 1% versus a weakened sterling, despite contributing little to either move. Eurozone macro data offered mixed signals: while Q3 GDP surprised to the upside, Germany’s flat print underscored the bloc’s broader stagnation. Yet, eurozone fundamentals have had limited influence on EUR/USD lately, with the Fed’s meeting driving the most notable bearish move. The ECB, by contrast, delivered a predictably uneventful meeting, leaving rates unchanged for the third time and reiterating its comfort with current levels. Lagarde emphasized a meeting-by-meeting approach, avoiding forward guidance and reinforcing the ECB’s cautious stance.
While EUR/USD remains largely a function of dollar dynamics and speculation of a break below $1.150 has emerged, a more hawkish ECB and modest growth improvement could support the common currency into year-end. But, an overly bullish EUR bias is contingent on softer US data and continued eurozone resilience.
This week, Germany’s September industrial production and factory orders are due. Following disappointing August figures and Q3 GDP growth that signaled stagnation, these releases will help assess whether the economy is still struggling to convert fiscal stimulus enthusiasm into tangible output. So far, the grit hasn’t materialized.
Sterling crosses trade below short- and long-term moving averages
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: November 3-7
All times are in GMT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
