Key Takeaways
- The US Dollar Index continues to rise, supported by hawkish Fed expectations and renewed AI optimism.
- EUR/USD struggles with long-term support levels as Fed and ECB meetings loom, with a hawkish Fed likely to pressure the euro further.
- GBP/EUR held firm ahead of the UK Budget announcement, with expectations for moderate fiscal measures and a cautious tone from the Chancellor.
- Market sentiment remains cautious, as earnings reports and GDP growth estimates could influence currency movements going forward.
USD: Hawkish winds favor dollar
The US Dollar Index closed higher for a third consecutive day yesterday, having found solid support near 101.50.
Renewed AI optimism this week coincides with a Federal Reserve meeting later today, where policymakers will deliver their September policy decision. A pause is widely expected, although markets appear relatively confident that December will bring another hike, currently pricing in a 91% probability.
Fed Chair Warsh is not known for revealing much during press conferences, and there is no dot plot or updated economic projections today to reinforce any hawkish message beyond his words alone. The vote split may offer some insight here.
That said, we believe the hawkish Fed narrative has been forgotten by markets enough amid AI anxiety that it should not be too difficult for investors to pick up on hawkish cues, consolidate expectations of a December hike, and keep the dollar supported.
After all, since the September meeting, geopolitical tensions have intensified, energy prices have marched higher, and September inflation figures, both CPI and PPI, came in hotter than expected. None of this suggests the Fed should be lowering its hawkish guard just yet.
It will also be telling how Warsh handles questions around AI-related risks, especially given that we are still in the midst of earnings season and investors remain highly sensitive to the topic. Keep an eye on Alphabet’s and Microsoft’s earnings reports, due a few hours after the Fed delivers its policy decision.
All of this is to say that while AI angst has eased this week, investors remain highly susceptible to the story and key tests still lie ahead. These include earnings from the big tech giants as well as Thursday’s first estimate of Q3 GDP growth.
The best-case scenario for dollar bulls is one in which Warsh says just enough to signal that a December hike remains on the table, while strong earnings and GDP growth help suppress AI concerns further, allowing the hawkish Fed narrative to regain traction.
Under this scenario, a retest of the 14 October high of 102.95 is a distinct possibility. Regardless, we remain relatively constructive on the dollar through the end of the week.
EUR: ECB policy trade-offs cloud the outlook
The euro’s brief recovery last week has already unwound, broadly in line with expectations. EUR/USD is back below 1.12 and continues to struggle beneath a sharply declining 21-day moving average, highlighting the strength of the prevailing downtrend.
Attention is now turning to major long-term support, where the 200-week moving average (1.1108) converges with the 50% retracement of the 2025-26 rally (1.1111). The former has not been breached since April 2025, but mounting pressure suggests its resilience is being tested. A clean break would leave the pair looking technically vulnerable and could signal a deeper retracement of the broader 2025-26 advance.
Beyond the charts, this week’s Fed and ECB meetings represent the next major test for EUR/USD. A hawkish Fed could provide the catalyst for a break below the key 1.11 support zone. Meanwhile, despite some relief after Moody’s maintained France’s sovereign rating, concerns over the country’s fiscal trajectory persist and French bond market stresses remain elevated.
The ECB also faces an uncomfortable trade-off. A more dovish tone could ease pressure on sovereign debt markets but widen policy divergence with the Fed and weigh on the euro. Equally, maintaining a tightening bias risks keeping borrowing costs elevated and prolonging strains in French fixed income markets.
Against this backdrop, the path to sustained euro gains appears narrow. Soft eurozone data, higher natural gas prices and continued bearish FX options positioning suggest risks remain skewed to the downside, particularly if the Fed reinforces expectations for higher US rates.
GBP: All eyes on the Budget
GBP/USD softened yesterday, mostly on a firmer USD as investors prepare for the Fed meeting later today.
GBP/EUR finished the session slightly higher, with the much-awaited UK Budget now only a few hours away.
The options market is telling. There is a mild bearish bias embedded in option pricing, with investors appearing more inclined to hedge GBP/EUR downside risk over the coming days than further out. Even so, we are merely back to pre-France fiscal crisis levels, so there is little here to suggest mounting market stress.
We do not expect the event to be a major sterling mover, barring significant policy surprises. We anticipate moderate cost-of-living support measures and moderate tax increases, but nothing overly ambitious.
Our view for some time has been that a boring Budget may ultimately prove the best-case scenario for UK assets: a cautious continuation of the Labour Party’s fiscal consolidation plans against a still-fragile geopolitical backdrop.
We will also be paying close attention to the OBR’s economic forecast revisions. With policy expectations already fairly muted, a stronger-than-expected outlook could stand out more. Keep an eye on the fiscal headroom figure. Current estimates suggest headroom has narrowed to around £10bn, down from £24bn in March, largely due to higher debt interest costs.
This would not be the first time. Last year’s projections looked bleak until Budget Day revealed a larger fiscal buffer than many had expected.
Overall, a boring but pragmatic Budget, delivered with the carefully calibrated language that Chancellor Hailey has consistently used to avoid unsettling markets, alongside stronger-than-expected OBR revisions, would provide the best backdrop for GBP bulls to justify further demand. In that scenario, we could see GBP/EUR move towards 1.20.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: October 26-30
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.
