Dollar rebounds ahead of Fed meeting

USD: Awaits Fed with AI earnings set to test yields

The US dollar has rebounded as AI-sentiment stabilises and investors position before the Fed meeting on Wednesday. The next dollar move will depend less on the widely expected hold than on how Chair Warsh frames the path ahead. Recent US data have strengthened the case for further tightening, with persistent energy and shelter pressures putting core PCE on track to end the year near 3.2%. A weaker September payroll report and downward revisions to historical inflation data have nevertheless given policymakers room to wait without suggesting the inflation problem has passed. With December hike odds still above 70%, Warsh needs to preserve a tightening bias without provoking another disruptive adjustment in rates.

Policymakers have made clear that stronger data alone will not force an immediate move. Vice Chair Williams and Governor Bowman have played down the need for an immediate move, while Warsh has avoided providing a clear roadmap. Regional Fed presidents Hammack and Logan may still favor a 25-basis-point hike, but a divided decision just before the midterms would create volatility without materially changing the broader policy path. The more useful signal will be whether the Fed preserves the case for December or gives markets a reason to question the next hike.

Demand remains firm enough to prevent the pause from becoming an easing signal. Third-quarter growth is tracking at a solid pace, while private domestic demand has held up despite the correction in AI-related equities. That leaves room for the Fed to resume tightening with quarter-point increases in December and January, taking the policy range to 4.25%–4.50%. That sequence depends on inflation remaining sticky without a sharper deterioration in employment, credit or broader financial conditions.

For the dollar, the Fed’s expected pause leaves DXY range-bound until markets turn their attention to December. In the meantime, earnings from the largest US technology companies could drive volatility through Treasury yields, with any renewed doubts about AI investment or returns likely to revive defensive demand for duration and weigh on the currency. Strong results would ease that pressure and allow relative rates to regain control. On Wednesday, a Fed tone that preserves the December hike case should keep DXY supported between 101.5 and 102.5, in line with the table’s base case, while any weakening of that case could bring attention to lower support near 101.

EUR: French bonds rally, euro gets some breathing room

The euro traded relatively quietly yesterday. We saw a more pronounced rebound against the CHF and JPY, which have attracted the most demand against the euro amid France’s fiscal turmoil. With Moody’s unchanged outlook easing some concerns, a degree of profit-taking in these trades made perfect sense.

It was telling to see EUR/USD lower on the day. That was mostly a USD story. Tech stocks rallied yesterday after OpenAI announced its IPO, injecting renewed momentum into the AI trade. Remember, the dollar had come under pressure in recent weeks as AI-related anxieties spread through markets, leading investors to scale back hawkish expectations for the Fed.

This renewed sense of optimism, coupled with a Federal Reserve meeting just days away, is bringing that resilient-growth/hawkish-monetary-policy combination back to the forefront of investors’ minds. The dollar is the clear winner in this environment.

On the data front, yesterday brought Germany’s October Ifo Business Climate survey. The index rose to 90.2 from 89.9 the previous month, marking the sixth consecutive monthly increase. The divergence between the expectations and current assessment components was particularly striking. Expectations improved sharply, while the current assessment eased. It neatly captured the challenging backdrop in which higher energy prices continue to weigh on sentiment, even as fiscal stimulus supports activity and keeps the broader outlook constructive.

Let’s see what Friday’s first estimate of third-quarter GDP growth brings.

We would not expect EUR/USD to stray too far from the 1.12 level ahead of Wednesday’s Fed meeting.

GBP: Budget risk looms, but expectations remain anchored

Sterling has started the week on a softer footing, underperforming most of its G10 peers as investors look ahead to tomorrow’s UK Budget and a busy slate of global risk events. GBP/USD has drifted back towards the 1.33 handle, with demand for the dollar reviving after the pair ran into resistance at its 100-day moving average, helping arrest sterling’s recent advance.

Against the euro, however, sterling has remained resilient, trading more than three cents above its five-year average.  but some signs of stretched positioning are emerging. That said, some signs of stretched positioning are emerging, with sterling remaining firmly in overbought territory according to the daily RSI, suggesting further gains may prove harder to come by without a fresh catalyst.

All eyes now turn to Chancellor John Healey’s Budget. Markets continue to approach the event from a position of relative confidence, with expectations that the Chancellor will maintain a disciplined fiscal stance helping to ease concerns around domestic risk. Indeed, currency investors appear increasingly comfortable that the Budget will pass without significantly rattling UK assets. While one-week implied volatility in GBP/USD has edged higher ahead of the announcement, it remains below its long-run median, suggesting traders are not positioning for a major market shock. Overnight implied vols have also ticked higher, but still imply only a modest 0.5% move in GBP/USD in either direction.

That constructive backdrop is also evident in the gilt market. Investors increasingly believe fiscal credibility will remain a priority, reinforcing the view that the political premium embedded in UK assets can continue to compress. As a result, gilts head into the Budget with a relatively strong hand.

For UK rates markets, the greater challenge appears external rather than domestic. Ongoing tensions in the Middle East continue to pose upside risks to inflation, helping keep around 100bps of additional Bank of England tightening priced into the curve. However, the risk-reward profile looks increasingly asymmetric. There is scope for some of that tightening premium to be priced out, while fully delivering those expectations would likely weigh on growth and ultimately increase the probability of policy easing further ahead.

Ultimately, the Budget still needs to reinforce the government’s commitment to fiscal discipline. But the UK is no longer viewed as the weak link among developed bond markets, and there is potential upside to fiscal headroom, whilst gilt yields continue to offer an attractive income cushion. Thus, the bar for a sustained sell-off in UK assets, including the pound, remains relatively high.

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.