USD: All eyes on US inflation
Investors are learning to tune out the static. President Donald Trump’s decision to end trade talks with Canada — in response to an anti-tariff ad campaign — didn’t rattle markets. The US dollar strengthened, suggesting traders see these headlines as more bark than bite and are betting that fundamentals will ultimately override the noise.
The next test for the dollar comes with today’s CPI release. While the Fed appears on autopilot toward a cut next week, inflation data could still reshape the path beyond. Fed officials have expressed comfort with the disinflation trend but remain data-dependent. With no fresh labour-market data since the last meeting, policymakers are flying blind — and markets are leaning heavily on assumptions, pricing in a cut as a near-certainty. But a sticky core CPI could challenge the notion of three cuts before Q2 next year.
Headline CPI is expected at 0.4% m/m and core at 0.3% with 3.1% y/y prints expected for both. Data quality may be clouded by missing price quotes post-shutdown, but soft survey data — including ISM and S&P PMIs — point to only modest price pressures. Factory input costs and services selling prices both slowed in September, reinforcing the disinflation narrative.
Market pricing suggests little fear of disruption: EUR/USD overnight volatility implies just a 50-pip move, and the JPMorgan Global FX Volatility Index remains near year-to-date lows. However, although CPI may not steer the Fed’s hand next week, it could recalibrate expectations for what comes after. And in a market primed for dovish continuity, even a modest upside surprise could jolt positioning.
GBP: Retail therapy for the pound
UK retail sales for September surprised to the upside, offering a timely boost to sentiment around the pound. The volume of goods sold online and in stores rose 0.5% from the previous month – considerably better than the 0.4% drop expected. This marked the fourth consecutive monthly rise, bringing sales to their highest level since July 2022.
This stronger print adds weight to the idea that UK consumption remains resilient despite fiscal uncertainty and sticky inflation. It could temper expectations for near-term Bank of England (BoE) easing too, especially if upcoming PMI data also shows improvement. Front-end gilts may fall (yields rise) in response, supporting the pound, particularly if traders reassess the dovish pricing that’s built up over the past month.
As a reminder, UK inflation data surprised to the downside earlier this week, which triggered a rally in front-end gilts and pushed rate cut odds for December to nearly 70%, up sharply from 40% just a day earlier. But we warned traders may be getting ahead of themselves. UK inflation has now plateaued near 3.8% for three straight months, suggesting stagnation rather than progress in disinflation. The BoE needs clearer signs that price pressures are easing before loosening policy. Business surveys show firms still expect inflation to average 3.4% over the next year — well above the 2% target — and the IMF recently warned the UK will face the highest inflation among major economies through 2026.
Moreover, cutting rates in December would imply a negative real policy rate, a tough sell when inflation remains sticky. That makes the recent rally in short-dated gilts look overstretched. For the pound, the implications are nuanced though. Lower rates reduce yield appeal and can weigh on the currency, but the UK still offers one of the highest terminal rates in the G10, limiting the downside. Sterling is already one of the weakest G10 currencies in H2 — down over 3% vs the US dollar and 1.5% vs the euro.
Still, options markets reflect growing caution, with rising demand for downside protection ahead of November expiries which capture the UK Budget risk event. Technically, GBP/USD remains above its 200-day moving average near $1.32. A break below would expose the August low at $1.31, with $1.30 the next key support.
EUR: Trading on thin air
EUR/GBP’s weekly price action saw a still politically bruised euro give way early on, as easing inflation pressures in the UK lifted the pair toward week-end – now set to close around 0.1% higher. This zigzag pattern was traceable throughout October, with the pair trading within a broad 0.8660–0.8720 range. Sentiment took hits on both sides: French political turmoil weighed on the euro, while continued UK fiscal concerns – now with higher tax hikes appearing more likely – and rising expectations of a BoE cut in November/December pressured sterling.
That said, we maintain a bullish outlook for the euro here, with the UK budget due at the end of November and further downside expected for sterling. An ECB comfortable with current levels also provides baseline support for the common currency.
Meanwhile, EUR/USD continues to tread water around $1.16, with pre-positioning ahead of today’s inflation report likely to drag it lower as expectations for a still-hot print loom. If confirmed, a more pronounced breach is expected – challenging the Fed’s recent dovish tone, though the proximity to the meeting makes major repricing unlikely. That said, a softer-than-expected outcome would flip the narrative, validating the Fed’s caution and sparking a sharper rebound.
Also on the radar: a batch of preliminary PMIs due later today, featuring France, Germany, and the broader eurozone.
Oil up almost 8% in a week
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: October 20-24
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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.
