US inflation next hurdle for the dollar

USD: Dollar looks to CPI for renewed support as bulls tire

Risk sentiment improved yesterday, with stocks staging a rebound after their worst weekly performance since President Trump’s 2025 tariff rollout. The S&P 500 fell nearly 5% last week.

A decline in oil prices also contributed, with Brent crude trading near $91 a barrel, down nearly 6% on the session. The benchmark remains ~20% below its peak last month.

The dollar index declined by around 0.6% as investors sold safe-haven Treasuries. Although we view the dollar-negative implications as temporary.

In our view, markets remain overly optimistic that the US and Iran will soon find a resolution to the conflict in the Middle East and that the Strait of Hormuz will re-open. The recent decline in energy prices has been highly speculative. Fears of escalation following the midterms have largely been unwound, while the Democratic victory has fuelled hopes that a blue Congress can play a more influential role in bringing the conflict to an end.

Only yesterday, President Trump said it was “highly unlikely” that he would order extensive strikes against the Islamic Republic.

The reality is that both sides appear unwilling to make major concessions, leaving negotiations effectively at a standstill. Secretary of State Rubio reinforced this view yesterday, downplaying the chances of rapid progress.

Alongside AI-fuelled growth concerns, the more benign energy backdrop has helped keep Fed tightening expectations more subdued in recent weeks, chipping away at one of the dollar’s key pillars of support. The 2-year OIS curve, a useful gauge of the short-term rates outlook, has fallen nearly 40bps from its late-September peak of 4.79%.

We doubt markets have much more de-escalation to price in until investors become hungrier for concrete developments. At the same time, US macro data continues to surprise to the upside, with last week’s nonfarm payrolls report a good case in point.

Eyes now turn to today’s October CPI release. Estimates point to a 0.3% monthly increase, although no year-on-year print will be published as October 2025 data is unavailable due to last year’s US government shutdown.

A hot reading should help cement expectations of a December Fed hike, lending support to the dollar.

That said, much of this already appears priced in (~85%). Combined with stretched bullish dollar positioning and a more constructive geopolitical backdrop (for now, at least), the case for a more forceful test of the key 102.500 resistance level is becoming increasingly thin.

EUR: Risk relief meets the CPI test

The euro has started the week on firmer footing, with EUR/USD up more than 0.7% and recovering Friday’s post-payroll losses as improving risk sentiment weighs on the dollar. Equities have rebounded, safe-haven demand has eased, and EUR/CHF jumped circa 0.5%, its strongest daily gain since late March.

Lower energy prices are adding to the relief. Brent crude is now down more than 20% month-to-date following more conciliatory US rhetoric toward Iran. While EUR/USD’s sensitivity to oil has weakened considerably over recent months, cheaper energy remains supportive for the eurozone through an improved terms-of-trade and growth outlook.

Still, the broader picture has changed little. EUR/USD remains trapped within the 1.1150–1.1250 range that has contained price action for several weeks, suggesting the latest recovery is not yet a meaningful breakout.

Today’s US CPI report is therefore the key test. Last week’s strong payrolls revived expectations for a December Fed hike, but markets have stopped short of fully pricing one. A softer inflation print could undermine that hawkish repricing and give EUR/USD the momentum required to break above 1.1250. Conversely, another firm reading would reinforce the dollar’s rate advantage and likely send the pair back below 1.12.

For now, the euro has regained some momentum, but US inflation holds the key to whether this becomes a breakout or simply another rotation within the range.

GBP: Bullish sterling trade faces a reality check

Sterling had a strong session against safe-havens CHF and JPY as risk sentiment stabilised.

It does look as though the recent market rout was ultimately a risk-trimming episode rather than a full reassessment of the AI story. If that proves to be the case this week, and equities continue to move higher, GBP looks set to retain the upper hand against lower-yielding safe havens.

In fact, the pound’s carry remains one of the most attractive in the G10, particularly after the BoE’s latest hike and the prospect of further tightening.

Elsewhere, GBP/USD bounced from 1.3350 back above 1.34 on the back of a weaker dollar. Meanwhile, GBP/EUR continues to struggle to breach 1.20.

This is a risk we had highlighted previously. With a hawkish BoE path already priced in and the psychological significance of the 1.20 level, a move lower from here appears more likely than a sustained break above it.

That is not to say GBP/EUR is bound to correct meaningfully. However, amid stretched bullish sterling positioning, investors may choose to trim some exposure until they gain greater clarity on the future path of monetary policy and can better assess the sustainability of the UK’s recent macroeconomic resilience.

In the meantime, a range-bound move between 1.20 and 1.1920 looks the more likely outcome.

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Calendar: November 09-13

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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.