Market overview
Currency markets are heading into the final trading session of October with a clear divergence emerging across the major currencies. Sterling continues to outperform, the euro is struggling to find support, and the dollar has lost some momentum despite encouraging US economic data. Central bank uncertainty, fiscal pressures and shifting bond yields are driving currency movements, while renewed concerns over the profitability of major technology investments are adding another layer of caution to global risk sentiment.
Both the Federal Reserve and European Central Bank have opted to leave interest rates unchanged, but the prospect of further tightening remains firmly on the table. The contrasting market reactions highlight how investors are increasingly focused on the outlook rather than the decisions themselves. With sterling approaching a significant milestone against the euro and the dollar struggling to regain traction, attention now turns to whether upcoming economic releases can reinforce the trends shaping the FX market.
USD: Strong economic data fails to lift the dollar
The US economy continues to demonstrate impressive resilience, with third-quarter GDP expanding by an annualised 3.4%, weekly jobless claims falling to 194,000 and core PCE inflation holding at 3.1%. These figures strengthen the argument for further Federal Reserve tightening, although the dollar has struggled to capitalise. Softer Treasury yields and fresh concerns surrounding the scale and profitability of AI investment have weighed on sentiment, leaving investors reluctant to increase dollar exposure without clearer guidance on December's policy outlook.
The Dollar Index has retreated from around 102.45 to approximately 101.9, slipping below its 20-day moving average while remaining above longer-term trend indicators. Meanwhile, the 10-year Treasury yield remains near 5%, reflecting persistent inflation concerns and government borrowing pressures. Although the broader dollar outlook remains supported by US economic strength, a sustained recovery may require markets to price in a more convincing prospect of additional rate increases.
GBP: Sterling approaches 1.20 following a reassuring Budget
Sterling has emerged as one of the stronger performers, with GBP/EUR reaching fresh multi-month highs and moving closer to the important 1.20 threshold. The pound has benefited from a relatively calm response to Chancellor John Healey's first Budget, which avoided the substantial fiscal surprises investors had feared. Although borrowing projections were revised higher, the decision to absorb additional pressures through existing fiscal headroom helped keep gilt yields stable and supported confidence in UK assets.
The pound's advance also reflects continued weakness in the euro, particularly as concerns surrounding French public finances weigh on sentiment towards the single currency. With UK economic data remaining resilient and the Budget largely passing without disruption, sterling retains a constructive near-term outlook. However, limited fiscal flexibility means the government will remain dependent on economic growth meeting expectations.
EUR: ECB caution and French fiscal concerns weigh on the euro
The euro remains under pressure after the ECB left interest rates unchanged at Thursday's meeting. Despite President Christine Lagarde highlighting persistent upside inflation risks and the possibility of further tightening, investors focused instead on deteriorating financial conditions and the potential impact on economic growth. Concerns surrounding France's public finances have reinforced expectations that tighter market conditions could reduce the need for additional ECB intervention.
EUR/USD briefly fell to around 1.1105 before recovering some ground, although the pair remains below its 21-day moving average near 1.12. Lagarde's announcement that she will step down on 7 February 2027 generated little immediate market reaction, with attention remaining firmly on monetary policy. While a December rate increase remains possible, the absence of significant second-round inflation pressures suggests the ECB can afford to remain patient. Without a meaningful improvement in economic sentiment, the euro may struggle to establish a sustained recovery.
Looking ahead
Eurozone economic data: Third-quarter GDP and September unemployment figures will provide further insight into regional economic resilience and expectations for December's ECB decision.
US economic indicators: The Employment Cost Index and Chicago PMI will offer additional signals on inflation pressures and economic activity following the Fed's decision to hold rates.
Sterling momentum: GBP/EUR remains within reach of 1.20, with continued euro weakness potentially providing the momentum needed for a breakout.
Central bank expectations: Markets will remain sensitive to changes in December rate expectations, with Treasury yields, European sovereign bond spreads and incoming economic data likely to influence currency direction.