USD: Flirting with resistance, dollar awaits Fed firepower
The US dollar index (DXY) has performed well so far this month – up ~0.7% – despite the ongoing U.S. government shutdown. Its largest constituents – the euro (57.6%) and the yen (13.6%) – have each faced political upheavals that sent both currencies lower, boosting the greenback. In Europe, persistent turmoil within the French government has weighed on the common currency, while in Japan, the election of pro-stimulus conservative Sanae Takaichi has raised concerns that the Bank of Japan may delay its recent shift away from ultra-loose monetary policy. Meanwhile, long-term bonds have sold off across the board in response to these developments – echoing the late-summer episode – further supporting the dollar through safe-haven flows.
Regarding the Fed’s rate expectations, we continue to believe that the two rate cuts priced in by markets for year-end represent an outsized move, suggesting that any hawkish repricing would likely support the dollar. More clarity on this may emerge later today from the Fed meeting minutes, unaffected by the shutdown.
DXY has tested resistance at 98.500. For this level to be sustainably broken, however, the dollar will need a consolidation of the Fed’s cautious stance – enough to start pricing out cuts for the October meeting. Meanwhile, investors appear to be brushing off shutdown-related risks for now. Reports suggest President Trump may be open to negotiating with Democrats on healthcare subsidies to resolve the funding stalemate, signaling mounting pressure within the White House as the shutdown enters its eighth day.
EUR: Shutdown silence, euro slides
EUR/USD has re-approached the $1.1650 support level, as France’s political instability continues to weigh on the euro. Since hitting its year-to-date high of $1.1919 on 19 September, the pair has revisited this support three times, recently entering a shutdown-specific range between $1.1650 and $1.1750. The range appears however fragile, and vulnerable to a downside break – particularly if today’s Fed minutes reinforce a cautious tone, prompting a hawkish repricing ahead of the October policy meeting.
In the options market, negative momentum continues to build for the euro. Short-term sentiment has tipped lower, with 1-week risk reversals turning negative – suggesting investors are more inclined to hedge against euro weakness than strength in the near term.
As for the credibility of these declines amid France’s renewed political risk, the silence stemming from the US government shutdown acts as an amplifier. The euro, which has largely depended on US-driven moves this year, is now grasping at alternative catalysts. Also, we still observe strong demand for euro longs – at levels not seen since 2023 – particularly among asset managers, who tend to shape longer-term currency sentiment. This contrasts with leveraged funds, which typically drive short-term speculative flows and currently hold a moderate underweight in the euro. Given how recent developments have dented euro sentiment – while bearish USD positioning appears less acute – these long euro positions may be starting to look overstretched. The resulting short-squeeze dynamic is contributing to the magnitude of the current declines.
GBP: Sterling’s mixed fortunes
Sterling is currently navigating a complex landscape, with its performance diverging sharply across major currency pairs. Against the euro, the pound has climbed to its highest level in nearly three weeks, buoyed by technical momentum that suggests further upside may be plausible after closing three days straight above €1.15. This relative strength, however, is not mirrored across the board. Outside of a striking 3% surge against the yen this week, the pound has generally softened against other major currencies. Notably, GBP/USD has retreated below the $1.34 threshold, as the dollar sweeps up excess demand from EUR and JPY selling.
The pound’s rally versus the euro is less a reflection of UK economic resilience and more a reaction to political instability in France. The prospect of a prolonged governmental vacuum in Paris has unsettled investors, prompting a recalibration of euro risk, which could see GBP/EUR extend towards €1.16 and partially close the wide gap with real rate differentials. Yet, the euro’s broader stability implies that markets are compartmentalising the French situation, viewing it as a domestic disruption rather than a systemic Eurozone threat. This containment has limited the pound’s ability to capitalise further for now, as eurozone-wide contagion fears remain subdued.
From a fixed income perspective, the pound faces additional headwinds. French bond yields have risen sharply in response to political uncertainty, and UK gilts have followed suit — a correlation that underscores the interconnectedness of European debt markets. Elevated UK borrowing costs, particularly as the government prepares its next fiscal statement, may act as a ceiling on sterling’s appreciation. The pound’s premium over most G7 sovereign yields remains intact, but it is increasingly viewed as a vulnerability rather than a strength, especially if fiscal policy fails to reassure investors.
In sum, while sterling has found tactical support against the euro, its broader trajectory is clouded by external political shocks, domestic fiscal pressures, and the recalibration of global risk appetite. The pound’s path forward will likely hinge on whether these crosscurrents intensify or begin to unwind.
Japanese yen has been sold off aggressively
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: October 6-10
All times are in BST
Have a question? [email protected]
*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.
