FX markets caught between risk and resilience
Market overview
Global currency markets are navigating a more fragile trading environment as mounting growth concerns, shifting interest rate expectations and geopolitical uncertainty reshape investor positioning. Traditional safe havens are attracting renewed demand, with the Japanese yen and Swiss franc benefiting from defensive flows, while the dollar's recent strength has started to fade. The euro remains under pressure from European fiscal risks, sterling is finding pockets of support, and commodity-linked currencies are responding to higher energy prices. With several major policy events approaching, traders are increasingly reassessing where the next significant moves in FX could emerge.
The deterioration in sentiment has been particularly evident in equities, with the Nasdaq falling 2.6% yesterday as investors questioned the sustainability of AI-driven valuations. Middle East tensions are adding another layer of uncertainty, with fresh attacks in Saudi Arabia and Brent crude approaching $114 a barrel. Markets appear increasingly concerned about the implications for global growth rather than solely the inflationary impact of higher energy costs. This shift has supported US Treasuries, weakened expectations of sustained Federal Reserve hawkishness and contributed to a broader recalibration of currency positions.
USD: Dollar correction tests bullish momentum
The dollar has surrendered some of its recent gains as falling Treasury yields and softer Fed expectations weigh on sentiment. The DXY is trading just below 102, having reached 102.945 on 14 October, its highest level since 2025. Despite the recent weakness, the broader bullish trend remains intact, suggesting the current pullback represents a temporary consolidation rather than a decisive reversal.
From a technical perspective, the 101.20 to 101.30 support zone remains a key downside level, with selling pressure unlikely to drive the index sustainably below this range ahead of next week's Federal Reserve decision. A renewed hawkish message from policymakers could restore upward momentum, particularly as markets remain reluctant to fully price out a December rate increase. Improving risk sentiment could also help the dollar consolidate against major peers, while reducing demand for the yen and Swiss franc. However, further equity market weakness may prolong the current correction.
With the Fed entering its pre-meeting blackout period, attention turns to today's S&P Global PMI releases. Activity is expected to moderate slightly, although readings should remain comfortably in expansionary territory.
GBP: Sterling steadies as Budget expectations build
Sterling has recovered against the dollar, with GBP/USD approaching 1.34 after spending several weeks around the 1.32 level. However, the pound has struggled against commodity-linked currencies as rising energy prices influence broader FX performance.
Attention is turning to next week's UK Budget, where fiscal credibility is likely to matter more than ambitious policy announcements. Modest tax increases and targeted cost-of-living support are anticipated, but the Office for Budget Responsibility's updated forecasts could prove more influential for sterling. Stronger growth projections and improved fiscal headroom would provide reassurance over public finances and potentially support further GBP gains. Nevertheless, with both the Budget and Fed decision approaching, GBP/USD may struggle to establish a sustained direction before these events.
EUR: French fiscal concerns keep the euro on the defensive
The euro continues to face selling pressure as concerns surrounding France's public finances undermine investor confidence. The spread between French and German government bond yields has widened beyond 170 basis points, reaching a 15-year high and encouraging flows into traditional safe havens. EUR/CHF has fallen 2.6% this month, while GBP/EUR has reached a 12-month high despite the UK's own fiscal uncertainty.
EUR/USD remains close to 1.12, with its 21-day moving average around 1.1250 limiting recovery attempts. Further widening in French bond spreads, particularly towards 200 basis points, could intensify pressure on the single currency. Today's eurozone flash PMIs will provide another important test, with French business sentiment expected to weaken. Any signs of broader regional deterioration could leave the euro struggling to regain meaningful support.
Looking ahead
US economic data: S&P Global flash PMIs will offer fresh insight into business activity and the resilience of the US economy.
Eurozone activity: October PMI releases will reveal whether French economic weakness is spreading across the region.
Federal Reserve: Next week's policy announcement could revive dollar strength if policymakers reinforce expectations of further tightening.
UK Budget: Updated OBR forecasts and the government's fiscal plans will be central to sterling's next directional move.
Geopolitical developments: Middle East tensions, oil prices and equity market volatility remain key drivers of global risk appetite and safe-haven currency demand.