USD: Strength by default
The US dollar’s rally is being propelled by a dual engine: deteriorating conditions abroad and recalibrated expectations at home. Political instability in France and dovish pivots in Japan have weakened the euro and yen — which together account for nearly half the dollar index — giving the greenback a relative lift. But domestic momentum is now reinforcing that trend. The latest Fed minutes struck a more hawkish tone, flagging persistent inflation risks and prompting traders to dial back rate-cut bets. This shift is reflected in a flatter yield curve, with short-term yields rising on expectations of a higher terminal rate.
Still, the dollar’s ascent is less about bullish conviction in US fundamentals and more about strategic selling of its major rivals. The yen is under pressure from Japan’s softer fiscal and monetary stance; the kiwi has been hit by the RBNZ’s surprise 50bp rate cut and dovish guidance; and the euro continues to slide amid deepening political uncertainty in France. Even the pound and Swiss franc are showing signs of strain — the former vulnerable to long-end bond volatility, the latter ranking poorly on fundamentals.
With few compelling alternatives, investors are rotating out of risk and into the dollar. Volatility skews reinforce this shift: USD/JPY one-month risk reversals are nearing parity for the first time in three years, while the euro is seeing its steepest bearish tilt in three months. This alignment across key currency pairs signals a broader conviction — the dollar is being favoured not for its strength, but for the weakness surrounding it.
As for US shutdown risks, the dollar has shown resilience. Any signs of constructive political dialogue may offer only modest and short-lived support. The real story remains abroad, for now.
EUR: EUR/USD hits 1-month low
The euro remained under pressure yesterday, with EUR/USD gathering further selling momentum after breaking below support at 1.1650. The pair slid toward 1.1600 – next in line – marking a one-month low.
The drop picked up speed after some disappointing German industrial production figures came out early in the day – down 3.9% y/y and 4.3% m/m – way below expectations and adding to worries about the bloc’s biggest economy stalling. This has fueled what is shaping up to be one of the euro’s worst weekly performances against the dollar this year – down ~1% week-to-date. Not even ECB’s Muller, whose remarks signaled that inflation is near target, growth remains steady, and there’s no urgency for further rate cuts, managed to stem the euro’s decline – suggesting the move has been largely sentiment-driven.
Adding to the downtrend – and reinforcing the sentiment-driven narrative – were reports that the EU fears newly proposed US demands for trade concessions could undermine the validity and sustainability of the 15% tariff rate agreed in late July. While specifics remain unclear, the US appears to be seeking an opening to challenge EU legislation, including digital and technology rules, corporate compliance, and climate-related regulations. With the deal not yet legally binding, manoeuvre space for tweaking terms remains – offering investors further incentive to sell the euro, as they did back in late July on the premise that the bloc’s negotiating power remains limited relative to that of the US.
Then came the Fed minutes. The expected cautious tone – paired with a willingness to pursue further cuts into year-end – gave euro buyers a fundamentally justified reason to step in at the key 1.1600 level.
We expect the pair to find some reprieve over the next few days as sentiment stabilizes, helped by Lecornu’s announcement that Macron will be able to name a new premier within 48 hours – allowing, also, the Fed minutes’ mild easing inclination to better sink in.
GBP: Hawkish hue offers pound a lifeline
The pound’s recovery against the euro is losing steam as political uncertainty in France begins to ease. Signs that French leaders may be nearing a deal to form a new government have tempered investor anxiety, reducing the euro’s risk discount and prompting a pullback in GBP/EUR. After touching a three-week high, sterling has slipped back toward €1.15, surrendering around 50 pips.
Against the dollar, the pound has declined for three consecutive sessions, with technical risks pointing to a slide toward its 200-day exponential moving average near $1.33. However, the Bank of England may offer a lifeline. Chief Economist Huw Pill’s hawkish remarks suggest resistance to a November rate cut, reinforcing the Bank’s inflation-fighting stance amid elevated price pressures. If rates are held, sterling could find renewed support from the UK’s relatively high yield environment. But should the Bank pivot to easing, the pound risks unwinding recent gains, potentially slipping back toward $1.30 and weakening further against the euro.
That’s not to say, sterling doesn’t remain vulnerable heading into the UK’s Nov. 26 Budget. While markets have largely priced in a fiscal premium, any unexpected deterioration in the government’s fiscal stance — such as higher borrowing or weaker growth projections — could trigger renewed downside in the pound. FX options traders are already positioning defensively, selectively adding protection against sterling weakness.
GBP/JPY up over 3% in a week
Table: Currency trends, trading ranges and technical indicators
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Calendar: October 6-10
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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.
