Market overview
The US dollar is heading for a strong finish to the week as persistent inflation, surging Treasury yields and increasingly hawkish Federal Reserve expectations reshape currency markets.
The dollar index has climbed to its highest level since April 2025, while sterling and the euro have struggled against the greenback. Renewed tensions surrounding Iran have pushed oil prices higher, adding to inflation concerns, while Nvidia's unexpected leadership shake-up has unsettled global technology stocks.
Despite the uncertainty, higher US yields continue to underpin dollar demand. Attention now turns to today's US producer inflation figures, which could determine whether the latest rally extends into next week.
USD: Dollar breaks higher as Fed tightening expectations intensify
The dollar has extended its rally, with the DXY index touching 103.2 on Thursday as investors reassess the outlook for US interest rates.
Stronger-than-expected inflation and hawkish Federal Reserve commentary have driven a sharp rise in Treasury yields. The benchmark 10-year yield has climbed above 5%, while the two-year yield has reached approximately 4.86%.
Markets now overwhelmingly expect another interest rate increase in December, with speculation growing over the possibility of a larger 50-basis-point move.
Geopolitical tensions have added further support. President Trump's dismissal of renewed negotiations with Iran sent oil prices higher, reinforcing concerns that energy costs could keep inflation elevated.
Meanwhile, Nvidia chief executive Jensen Huang's sudden departure has shaken confidence in the technology sector. Although the dollar has remained resilient, a sustained sell-off in US equities could eventually weaken the investment flows that have supported the currency.
For now, momentum remains firmly in the dollar's favour. A sustained move above 102.50 on the dollar index would strengthen the case for further gains towards 104.00 and potentially 104.60.
Today's US Producer Price Index report will be crucial. Another inflation surprise could accelerate the rally, while softer figures may trigger a pullback as investors reassess the Federal Reserve's next move.
GBP: Strong UK growth supports sterling, but dollar strength dominates
Sterling has faced renewed pressure against the dollar despite encouraging signs of resilience in the UK economy.
Official figures released Thursday showed UK GDP expanded by 0.7% in the third quarter, while September growth reached 0.2%, exceeding expectations for stagnation.
The figures reinforce expectations that the Bank of England may need to maintain a restrictive monetary policy stance as inflation remains elevated.
However, domestic support has done little to shield the pound from the dollar's advance. GBP/USD has fallen more than 2% from last week's levels near 1.35, with the pair now vulnerable to further weakness towards 1.32.
Against the euro, the outlook remains more constructive.
GBP/EUR has retreated from its recent highs around 1.20 but continues to hold near its 21-day moving average at approximately 1.1950. This remains an important technical level, with a sustained hold supporting the broader upward trend.
Sterling's relative strength reflects the UK's resilient growth outlook and expectations of further Bank of England tightening. With the euro facing its own challenges, the recent GBP/EUR pullback may prove temporary.
Next week's UK employment, inflation and retail sales figures will be closely watched for further direction.
EUR: Euro slips below key support as dollar advantage widens
The euro remains under sustained pressure as widening interest rate expectations between the US and eurozone weigh on the single currency.
Although European Central Bank officials continue to signal the possibility of another December rate increase, investors see a stronger case for prolonged monetary tightening in the United States.
This divergence has pushed EUR/USD below the important 1.11 level, with the pair now approaching its next major support at 1.10.
A decisive break below that threshold could open the door towards 1.0880, particularly if US inflation remains stubbornly high.
Political and fiscal uncertainty in France is adding to the euro's difficulties, while the eurozone's weaker economic outlook offers limited support.
Today's updated eurozone GDP figures and further ECB commentary may influence sentiment, but the immediate direction of EUR/USD is likely to remain dominated by US inflation and Federal Reserve expectations.
Unless the gap between US and European rate expectations begins to narrow, the euro could remain under pressure into year-end.
Looking ahead
US inflation: Today's October PPI release is the immediate focus. A stronger reading could reinforce expectations of further Fed tightening and extend the dollar's gains.
Dollar index: Holding above 102.50 keeps 104.00 and 104.60 in focus, while a weaker inflation reading could challenge the breakout.
GBP/USD: The pound remains vulnerable to further dollar strength, with 1.32 an important level to monitor.
GBP/EUR: Support near 1.1950 remains key to sterling's broader upward trend against the euro.
EUR/USD: The 1.10 level is the critical test. A sustained break lower could expose 1.0880 as the next downside target.
UK economic data: Next week's employment, inflation and retail sales releases will help shape expectations for the Bank of England's December decision.