Event risk cranks up a notch

USD: A changing risk narrative

While the dollar initially found support from geopolitical uncertainty and higher oil prices, the latest bout of risk aversion has instead favoured JPY and CHF, highlighting growing market sensitivity to the AI-driven growth narrative.

Global equities came under pressure on a combination of higher oil prices and renewed AI-related concerns, but FX markets delivered a clear message: the dollar is no longer the preferred defensive asset. This coincided with a reassertion of the traditional negative correlation between bonds and equities. US rates rallied alongside the equity sell-off, with 10-year Treasury yields falling back below 5.0% for the first time in a month and front-end rates also declining, suggesting investors are becoming less convinced that the Fed will need to deliver an extended tightening cycle.

Markets have become increasingly confident that the Fed will remain on hold this week, with AI-related growth concerns contributing to some moderate dovish repricing. However, the hurdle for fully removing expectations of a December hike remains high, which should limit the scope for a broader USD correction for now.

Any stabilisation in risk sentiment might also allow the dollar to consolidate and curb some of the recent outperformance in JPY and CHF, but. importantly, the source of risk sentiment matters. Reports of a meeting in Tehran involving Saudi, Pakistani and Turkish officials have helped improve sentiment at the margin and supported equity futures. Yet the USD index has remained under pressure, likely reflecting the accompanying decline in energy prices and the resulting erosion of the US terms-of-trade support that had previously underpinned the dollar.

EUR: France gets Moody’s relief

Some relief from France. The country avoided a downgrade from Moody’s last Friday. The rating agency expects the 2027 budget to be adopted and the deficit to narrow to 5.2% from 5.4% this year. OAT yields eased on Friday and appear relatively calm as European trading gets underway.

The euro appears to be pricing in some cautious optimism, rising against most major peers.

However, the news is not set to put an end to all of the euro’s troubles. The situation is far from resolved, but should markets begin to settle around the prospect of a budget being approved, regardless of however many concessions may be made to opposition parties, that should help keep selling pressure contained.

This week, the focus shifts to the ECB policy decision on Thursday, where a hold is expected. That said, investors will be most interested in how the ECB views the situation in France and whether it has altered the Bank’s reaction function in any way. Markets may prove overly sensitive to signs of dovishness, given that lower rates would help keep bond market turmoil in France subdued.

ECB President Lagarde will need to be particularly clear that the Bank’s priorities remain centred on inflation to re-establish its hawkish credentials and keep expectations of a December rate hike alive. Markets are currently pricing a 76% chance of a hike in December.

Either way, we do not see either outcome as being supportive for the euro, which has struggled to benefit from the ECB’s hawkish signals since the conflict began in early 2026.

EUR/USD continues to hover around 1.12, pressured lower by its 21-day moving average. Euro bears are in need of a Federal Reserve that revives its hawkish stance at this week’s policy decision. Under that scenario, we would see the pair make its way towards the 14 October low of 1.1113.

GBP: Mind the Budget gap

Markets appear remarkably relaxed ahead of Wednesday’s UK Budget, the key domestic risk event for GBP this week. The pound continues to trade near recent highs, after GBP/EUR reached a 12-month peak at 1.1959 last week and GBP/USD pushed back towards 1.34. While cable has gained almost 1% this month, technical resistance remains evident, with both the 50- and 100-day moving averages capping upside progress over the past week.

The resilience in sterling sentiment has been underpinned by last week’s stronger-than-expected inflation and labour market data. The combination of sticky price pressures and a still-tight labour market have further reinforced expectations of a Bank of England (BoE) rate hike in November.

Importantly, the market reaction was GBP-positive, suggesting investors remain focused on the rates outlook rather than the potentially negative fiscal implications of higher inflation. Alongside this, sterling continues to benefit from its position as one of the highest-yielding currencies in the G10, helping attract ongoing investor demand.

Looking ahead, Wednesday’s Budget is the main domestic risk event for sterling this week. While the policy announcements themselves are expected to be relatively modest, the market focus will be firmly on the fiscal outlook and the accompanying Office for Budget Responsibility (OBR) forecasts.

For FX markets, the key question is how the Budget impacts investor confidence in the UK’s borrowing trajectory. If markets judge the government’s borrowing plans to be too much, investors typically demand a higher return to hold UK government debt, pushing gilt yields higher for the wrong reasons. In that scenario, sterling can weaken alongside rising yields, as investors interpret the move as a growing UK risk premium rather than a reflection of stronger growth or tighter monetary policy.

Conversely, a Budget that keeps borrowing expectations contained and is supported by upgraded OBR forecasts would likely reassure gilt markets and help anchor long-term borrowing costs. That would leave sterling freer to trade on the factors that have supported it in recent weeks, namely resilient economic data, persistent inflation pressures and expectations for further BoE tightening.

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.