Dollar firm, euro under pressure
Market overview
FX markets have started the week with a distinctly defensive tone, with investors favouring currencies offering either yield support or traditional safe-haven characteristics. The dollar remains close to its 2026 highs, but the broader move is not simply a dollar story. The Swiss franc and Japanese yen have also strengthened against the euro, while sterling has outperformed the single currency as investors reassess relative fiscal and political risks across Europe.
The key theme is growing divergence. US rates continue to offer support to the dollar despite softer payrolls, sterling is benefiting from comparatively attractive yields and a less troubled fiscal narrative, while the euro is being dragged lower by widening sovereign spreads and concerns over France’s budget outlook. With volatility still relatively contained, relative yield, fiscal credibility and political risk are doing much of the work across major FX pairs.
USD: Dollar supported despite softer jobs data
The dollar remains near its highs for the year, with DXY pushing towards the 102.5 to 103 area. Friday’s payroll report briefly slowed the move after the US added just 29,000 jobs in September, wage growth eased and unemployment rose to 4.2%, prompting markets to reduce the probability of an October Fed hike.
However, the broader rate backdrop remains supportive. A December hike is still heavily priced, while elevated long-term yields continue to reflect persistent inflation concerns, fiscal risks and a higher term premium. The dollar is also benefiting from weakness elsewhere, particularly in the euro, which carries a significant weighting in DXY.
This week’s ISM services data and FOMC minutes will be important. Any evidence that service-sector inflation remains firm, or that policymakers continue to favour further tightening, could reinforce the dollar’s advantage over currencies backed by less resilient central bank expectations.
GBP: Sterling gains as euro weakness opens opportunity
Sterling has started the week on stronger footing, with GBP/EUR moving above 1.18 for the first time since early July. The move is significant given how rarely the cross has traded above this level over the past decade and may offer an attractive window for UK importers with euro requirements.
The move reflects relative strength rather than a major improvement in the UK outlook. Investors remain cautious on domestic fiscal policy, but the UK is currently being viewed more favourably than parts of the euro area, particularly France. UK yields also remain among the highest in developed markets, which continues to support sterling through carry demand.
Against the dollar, the picture is less convincing. GBP/USD remains around the low 1.32s, with sterling caught between supportive UK yields and a dollar that continues to benefit from both carry and defensive demand.
EUR: Fiscal concerns deepen pressure on the single currency
Sentiment towards the euro has deteriorated sharply, with EUR/USD falling below 1.12 for the first time since May 2025. The euro has also lost ground against the Swiss franc and Japanese yen, highlighting that investors are not simply buying dollars, but actively rotating into perceived safer currencies.
The main pressure is coming from sovereign debt markets. Concerns over France’s fiscal outlook and 2027 budget negotiations have pushed the French-German yield spread to its widest level since 2012, while wider Italian spreads have raised concerns that stress could broaden across the bloc. Although current conditions remain far removed from the eurozone debt crisis, fragmentation risk is returning as an important FX driver.
The euro is also receiving limited support from interest-rate expectations. Markets have scaled back the expected ECB tightening cycle more aggressively than the Fed’s, reflecting concern over the growth impact of higher borrowing costs and elevated energy prices. With no obvious near-term catalyst for a recovery in French assets, EUR/USD may remain vulnerable while sovereign spreads stay elevated.
Looking ahead
US ISM services: a firm inflation component would support the dollar and strengthen the case for further Fed tightening.
FOMC minutes: markets will look for confirmation that policymakers remain open to another hike later this year.
French bond markets: further widening in OAT-Bund spreads could keep pressure on the euro and support safe-haven demand.
ECB commentary: investors will assess how officials balance inflation concerns against rising sovereign and growth risks.
GBP/EUR: a sustained break above 1.18 could keep the pair attractive for UK importers, although recent sterling gains are becoming increasingly stretched.