USD: Dollar eases on credit concerns, Fed tone and political uncertainty
US dollar bulls will have to wait a little longer. The greenback extended its decline this week, marking four straight sessions in the red. While still modestly positive for the month, the dollar remains locked in a narrow trading range, a continuation of the consolidation phase that began in late May. Meanwhile, both the yen and euro have recovered, capitalizing on the dollar’s softness.
Investor sentiment remains fragile, with renewed concerns around US regional banks adding to a growing list of global headwinds. The prospect of a government shutdown and lingering trade tensions are also weighing on the outlook for global growth. In rates markets, the 10-year US Treasury yield dipped below 4% on Thursday, while the 2-year yield fell beneath 3.4%, a level not seen since early April. This move suggests markets are increasingly pricing in the possibility that the Fed may need to cut rates below neutral to cushion the economy.
The catalyst for the latest rally in Treasuries appears to be rising unease over hidden credit risks within the US regional banking sector, which is reigniting fears of broader financial instability.
Also, released this Wednesday, the latest Beige Book painted a picture of stagnant economic activity, reinforcing the cautious tone from Federal Reserve officials who continue to signal a measured approach to rate cuts. Adding to the bearish sentiment is the rising risk of political gridlock: Polymarket now places the odds of a government shutdown lasting over a month at more than 70%. Against this backdrop of tepid growth, sticky inflation, and mounting political uncertainty, markets are now pricing in two additional rate cuts this year with near certainty, even ahead of next week’s closely watched CPI release. Dollar bulls take notice.
The October Beige Book revealed a mixed economic landscape, with overall activity showing little change or slight softening. Three Districts reported modest growth, while four saw slight declines. Consumer spending edged lower, particularly among lower- and middle-income households, who are increasingly price-sensitive and cautious. In contrast, higher-income consumers continued to spend on luxury services. Sectoral performance was broadly muted: agriculture, energy, and transportation all saw declines, while manufacturing struggled under the weight of higher tariffs and weakening demand. Real estate remained mixed, though some improvement in business lending was noted, thanks to lower rates.
Labor market conditions were similarly tepid. Employment levels held steady, but labor demand softened, with many firms trimming headcounts via layoffs or attrition. A notable trend emerged: increased investment in AI technologies, which some employers cited as a reason for reduced hiring. Labor availability improved, enabling firms to lean on temporary or part-time workers. Despite the slackening demand, wage growth remained modest to moderate, driven in part by rising costs especially, employer-sponsored health insurance, which saw outsized increases. Inflation pressures persisted, with input costs climbing due to higher import prices and rising service expenses, keeping overall inflation above the Fed’s 2% target.
In this environment, the Fed appears poised for another quarter-point rate cut at its October meeting. Governor Christopher Waller, seen as a potential successor to Chair Jerome Powell, has advocated a cautious approach: “Go carefully, do 25, and wait to see what happens,” he said, echoing Powell’s recent messaging. This incremental easing is designed to support growth while keeping inflation risks in check. As expected, Governor Stephen Miran disagreed, as he continues to push for a larger, half-point reduction. Known for his unconventional economic views, Miran argues that US-China trade tensions pose a significant downside risk, which could be exacerbated if monetary policy remains too tight. Still, he concedes that the Fed is likely to stick with the expected 25-basis-point move.
EUR: Cycle highs in sight, but still a test
EUR/USD has risen nearly 1% this week, staging an impressive rebound after two turbulent weeks – buoyed by Lecornu’s win, which brought parliamentary confidence and a much-needed dose of political stability. The pair is now eyeing early-October resistance at 1.1750/1.1770.
Yet the push wasn’t purely France-driven. As we noted earlier, domestic relief alone was unlikely to sustain such a swift turnaround. On the US side, sentiment has had its own shake-up – not overtly through data, given the ongoing shutdown – but via mounting concerns over US credit standards. Two US regional banks slumped after reporting issues with loans linked to fraud, adding to pre-existing fears of froth in the current stock rally and rising trade tensions. Markets turned risk-off quickly. We believe the shutdown may have amplified the dollar’s decline. Still, this is far from a credit collapse. The fall in USD alongside a rally in Treasuries – with the 2-year yield dropping to its lowest since 2022 – signals that demand for US duration remains intact, even as broader sentiment toward USD and risk assets softens.
The now-familiar dovish lean from the Fed added further pressure to the dollar. As noted in yesterday’s commentary, the Fed’s dovish tone has anchored EUR/USD near the 1.18 level. The pace at which that gap is filled will depend on how the USD-centric sentiment triggers unfold. That said, for the pair to break into new year-to-date highs, currently at 1.1919, US sentiment would need to deteriorate meaningfully from here – either through an escalation in trade tensions or a worsening of credit concerns. But we view both events as unlikely.
As for the Fed, we don’t expect a more forceful dovish tilt – especially with its imminent blackout period beginning on 18 October ahead of the October meeting. With two cuts already priced in and the Fed remaining cautious despite its clear preference for easing, a higher rate-differential-implied EUR/USD level appears improbable – leaving us skeptical that today’s dovish shift alone will be enough to push the pair to new year-to-date highs.
GBP: Short-lived strength, long-term strain
GBP/USD moved away from the 200-day moving average – previously flagged as a key downside trigger if breached – as sterling enjoyed a steady week against G10 peers, supported by the absence of any clear signs of a significantly worsening economic outlook. Only to post moderate end-of-week losses against safe-haven currencies, CHF and JPY, as risk-off sentiment tied to the U.S. credit story took hold.
For a market already positioned GBP-negative, even modest data beats versus low expectations tend to elicit a positive reaction. That was the story for sterling this week. But the relief is likely short-lived. The GDP figure, while in line with expectations and enough to sway short-term price action, does little to structurally improve the UK’s economic outlook or generate the kind of fiscal headroom needed for more comfortable policymaking.
With further tax hikes expected in the November budget, already timid economic momentum risks stalling further – tightening what is already one of the narrowest fiscal margins the government has faced in years.
GBP roars against Antipodeans
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: October 13-17
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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.
