Fed hikes fail to stick

USD: Strong US data fail to revive dollar bid

Thursday’s data made the Fed’s decision to hold more difficult to defend. Third-quarter GDP expanded at a 3.4% annualized pace, initial jobless claims came in at 194,000 and core PCE held at 3.1% year over year. Flat real personal spending and a softer GDP price index added some restraint, but the broader picture is one of firm growth and persistent inflation. The economy is absorbing higher rates, giving the Fed room to move gradually, although that resilience has not translated into fresh dollar demand.

The dollar has partially surrendered its pre-Fed gains despite a clearly supportive run of data. Alphabet’s results revived questions about the scale, financing and eventual returns of the AI investment cycle, capping demand for US growth assets while Treasury yields edged lower. The decline in DXY is modest, but the market response is telling: strong data have kept December in play without creating a fresh catalyst for the currency. Investors may need a clearer signal that another hike is coming before rebuilding long-dollar exposure.

The bond market reflects that hesitation. Two-year yields initially fell as traders removed the risk of an immediate hike, while the 10-year held near 5.00%, leaving the 2s10s curve around 33 basis points. The front end welcomed the delay, but the long end continues to reflect inflation, fiscal supply and the possibility that waiting now produces a higher policy peak later. The economy’s reduced sensitivity to rates helps explain the resilience of longer yields, but the dollar may need a firmer repricing of December and even January before relative rates generate another sustained advance.

DXY has faded from its pre-Fed high near 102.45 to around 101.9 and is trading just below its 20-day moving average near 102. The index remains above its 50-day, 100-day and 200-day averages, so the broader trend remains constructive even as near-term momentum softens. A renewed advance requires stronger conviction around December-January tightening; beyond the next Fed move, the US midterms will be the next test for the dollar, with the result carrying implications for fiscal policy, Treasury yields and the US growth premium.

EUR: Markets hear doves, not hawks

The ECB left its key rates unchanged at yesterday’s September policy meeting. There was a hawkish tone from President Lagarde, who stressed that inflation risks remain tilted to the upside due to the conflict in the Middle East, noted that the economy continues to prove resilient, and admitted that the Governing Council had considered a rate hike in September.

However, markets preferred a dovish interpretation. Bonds across the eurozone rallied, particularly at the short end of the curve, while the euro weakened, although it later pared those losses.

Why? France may be the culprit. Investors remain highly sensitive to the country’s fiscal woes, so when the ECB policy statement highlighted that financial conditions are tighter today than at the Governing Council’s previous meeting, alongside clear risks to growth, markets interpreted it as the market doing the ECB’s job for it: keeping the economy sufficiently constrained.

In other words, the thinking goes: “There is less need to hike rates further if markets are already exerting restraint.”

That dovish interpretation gained further support as Lagarde explained that there remains little evidence of second-round effects from the energy shock. The ECB-market tightening mix appears to be working, at least for now.

Perhaps the more notable piece of news was Lagarde’s announcement of her earlier departure, scheduled for 7 February. Markets, however, were largely unmoved by the development.

EUR/USD fell to an 18-month low of 1.1105 in the immediate aftermath of the policy decision before paring those losses. The pair remains capped by the 21-day moving average near 1.12.

Today, attention turns to the first estimate of eurozone Q3 GDP growth, followed by September’s unemployment rate. A stronger-than-expected release would help investors consolidate bets on a December rate hike, but we doubt the euro would have much to gain.

GBP: Pound rises to fresh 18-month high versus euro

Sterling enjoyed a strong session on Thursday, with GBP/EUR climbing to fresh 18‑month highs and moving within touching distance of the psychologically important 1.20 level. The move reflects both a supportive domestic backdrop and continued weakness in the euro.

The key domestic event was Chancellor John Healey’s first Budget. While the government confirmed it will need to borrow more over the coming years, the market reaction suggests investors viewed the revisions as modest and broadly in line with expectations. Rather than launching a significant new borrowing or tax package, Healey chose to absorb much of the fiscal pressure through the government’s existing headroom. The result was a relatively benign outcome for UK assets, with gilt yields broadly stable and sterling strengthening.

That response is important. Fiscal credibility has been a recurring concern for sterling over recent years, and the absence of a negative reaction suggests markets remain willing to give the government the benefit of the doubt, at least for now. That said, the UK’s fiscal position remains tight and much will need to go right economically if further tax increases are to be avoided next year.

Against the euro, sterling continues to benefit from relative rather than absolute strength. Concerns surrounding French public finances and widening sovereign spreads have increasingly shifted investor attention towards the eurozone’s fiscal challenges. Where the UK was often viewed as the problem child in recent years, France has increasingly inherited that label in 2026.

For now, the combination of a stable Budget outcome, resilient UK data and ongoing euro weakness continues to support sterling’s advance.

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Calendar: October 26-30

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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.