USD: Dollar looks stretched ahead of CPI
The dollar is consolidating just below its 2026 highs ahead of today’s CPI report, but the five-week rally is starting to look stretched as market pricing catches up. Calls for a peak after softer payrolls proved premature, particularly once French turmoil renewed demand for the greenback. Yet with one-year, one-year OIS topping out and the probability of a December hike already near 86%, medium-term Fed expectations appear largely priced in. The dollar still has support, but extending the rally now requires a fresh inflation upside surprise.
Wider yield differentials against Germany and the euro continue to provide a floor, but the broader G7 rate advantage looks increasingly reflected in current valuations. Stress in credit markets also suggests the Fed’s tightening cycle may be limited even with December hike odds fully priced in. Chicago Fed President Goolsbee’s warning about tariff- and oil-driven stagflation captures the policy tension: inflation may remain elevated even as tighter financial conditions weaken demand.
Brent crude around $105 is sustaining the energy-inflation channel and preserving part of the dollar’s structural support. Yet a technology-led equity selloff and JPMorgan’s earnings shortfall have weakened risk appetite without generating another meaningful safety bid. US asset outperformance remains favorable for the dollar over time, but recent flat response suggests the currency may struggle to extend its rally without a fresh catalyst.
Today’s CPI report will determine whether consolidation gives way to another advance or a tactical correction. An upside surprise could revive expectations for an October hike and push DXY through resistance toward 103. A core reading in line or below 0.2% month over month would instead reinforce the view that Fed will hold this month and dollar valuations have become stretched, exposing a pullback toward key support at 101.5.
EUR: Hopes for breathing room from today’s US inflation print
A confluence of factors weighing on the euro makes it difficult to identify where the recent selloff will pause. For EUR/USD, this is not just a euro story. Higher US yields, driven by a hawkish Fed and resilient growth expectations, have also played a major role in the decline.
Since its 9 September high of $1.1654, the pair has fallen 4.3% to $1.1153, its lowest level since May 2025.
We believe a sizable portion of the pessimism surrounding France is already priced in. Investors may therefore shift their focus to the US side of the equation, with the September US inflation release taking centre stage today.
A softer-than-expected inflation print would likely provide some support, although we do not see it altering the broader direction of travel.
At most, it would reinforce the consensus view that the Fed is likely to pause this month while keeping a December rate hike firmly on the table. In that scenario, we would expect EUR/USD to hold around 1.12 in the coming days.
GBP: Beyond the euro’s weakness
The pound’s gains against the euro flatter sterling somewhat. GBP/EUR has climbed 2% since the end of September, is now over 3% higher on the year and touched its highest since June 2025 yesterday. But this reflects euro weakness more than pound strength. Sterling has only outperformed the Japanese yen and New Zealand dollar this month and has fallen against all other major peers.
Against the dollar, the picture remains more balanced. GBP/USD has edged higher from the low-1.32s, helped by a modest pullback in the dollar as investors take profits following its rally to 18-month highs.
Looking ahead, higher-for-longer energy prices are strengthening the case for a Bank of England (BoE) rate hike on 5 November. With inflation threatening to approach 4%, a level the BoE associates with stronger second-round price effects, policymakers may feel they have little choice but to maintain a restrictive stance. Such an outcome would reinforce sterling’s appeal as one of the higher-yielding currencies in the G10.
Domestic politics could also become more relevant. Prime Minister Andy Burnham’s first budget on 28 October is expected to include cost-of-living support measures, but we anticipate these will be funded, limiting the risk of a gilt market backlash.
Moreover, although there is little evidence that improving UK-EU relations are providing a meaningful boost to sterling just yet, the increasingly constructive rhetoric could gradually move up the pecking order of factors driving the pound. While macro forces and global risk sentiment remain dominant, a stronger relationship with the UK’s largest trading partner is likely to provide a supportive underpinning for sterling over the medium term, particularly if it helps reduce some of the post-Brexit discount that has weighed on UK assets.
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Calendar: October 12-16
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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.
