Market overview
Currency markets are heading towards the end of the week with a decisive shift in momentum. Changing interest rate expectations, rising bond yields and contrasting economic performances are reshaping the FX landscape. The dollar is firmly back in control, sterling is finding support from resilient UK growth, and the euro is struggling to defend key levels. Meanwhile, the recovery in global equities has offered little relief to risk-sensitive currencies, highlighting how central bank policy is increasingly driving market direction.
The latest US inflation surprise has intensified this trend, pushing Treasury yields higher and widening the gap between US and European interest rate expectations. Investors are now reassessing how aggressively the Federal Reserve may need to tighten policy, with speculation over a larger December rate increase gathering momentum. With another important US inflation release approaching, currency markets could be set for a volatile finish to the week.
USD: Dollar strengthens as Fed bets intensify
The US dollar is trading near its strongest level in more than a year, supported by a sharp reassessment of Federal Reserve policy. Following stronger-than-expected inflation and hawkish comments from policymakers, markets now anticipate approximately 77 basis points of tightening over the next five Fed meetings, almost double the amount priced in last week.
Fed Governor Christopher Waller has raised the possibility of a larger 50 basis point increase in December, adding further momentum to the dollar's advance. The US 10-year Treasury yield has also touched 5%, reinforcing the currency's yield advantage. With the dollar index challenging its 200-week moving average, Friday's producer inflation figures could provide the next catalyst for further gains.
GBP: Strong UK growth, but sterling struggles against the dollar
Sterling is receiving support from an increasingly resilient UK economy, with GDP expanding by 0.7% in the three months to September, its strongest performance in two years. Investment growth of 1.7% and a 3.1% annual rise in industrial production have strengthened the case for the Bank of England to maintain a relatively hawkish stance.
However, the pound's performance remains mixed across the major currency pairs. GBP/EUR continues to find support around 1.1945, despite struggling to break above 1.20, as weaker eurozone sentiment works in sterling's favour. Against the dollar, the picture is less encouraging. Renewed expectations of aggressive Federal Reserve tightening have pushed GBP/USD below 1.33, with 1.3250 and 1.32 the next levels to watch. The divergence highlights that sterling's recent weakness against the dollar is being driven more by US strength than deteriorating UK fundamentals.
EUR: Euro faces mounting downside pressure
The euro continues to lose ground as the gap between US and eurozone monetary policy expectations widens. While Federal Reserve officials are signalling the potential for more aggressive tightening, European Central Bank commentary has struck a more cautious tone, leaving the single currency at a growing disadvantage.
EUR/USD has slipped below the important 1.11 level, reaching its weakest point since May 2025. The break beneath previous technical support has brought 1.10 firmly into focus, with 1.0880 the next significant level should selling pressure intensify.
Persistent French fiscal uncertainty and wider European political concerns are adding to the euro's difficulties. However, with bearish positioning already elevated, the risk of temporary rebounds remains, even as the broader outlook continues to favour the dollar.
Looking ahead
US producer inflation: Friday's PPI release will be closely watched for further signs of persistent price pressures and could dictate the dollar's next move.
Federal Reserve expectations: Investors will assess whether incoming data justify a larger December rate increase.
EUR/USD: The 1.10 level remains a critical area of support, with further weakness potentially opening the door towards 1.0880.
Sterling: GBP/EUR will look to maintain support around 1.1945, while GBP/USD faces further downside risk below 1.33.