FX markets on geopolitical alert

Market overview

Currency markets enter the new week with the dollar firmly in control, sterling showing resilience and the euro struggling to regain momentum. Escalating tensions in the Middle East, changing interest rate expectations and growing European fiscal uncertainty continue to shape trading conditions. The dollar has now advanced for four consecutive weeks, its longest winning run since 2025, while rising energy costs and persistent inflation concerns are reinforcing demand for the greenback. Despite the strength of the dollar, currency performance remains uneven, with sterling outperforming the euro as investors reassess the relative economic and political outlook across major markets.

Geopolitics remains a central influence on market sentiment following the weekend attack on Riyadh airport, which has heightened fears of a broader regional conflict. Meanwhile, reports of a potential Russia-Ukraine energy ceasefire have offered some relief to energy markets, although the absence of formal Russian confirmation leaves uncertainty surrounding the agreement. With US bond markets closed for Columbus Day, trading volumes may be subdued today, but the week ahead offers several potential catalysts for renewed volatility. US inflation figures, UK growth data, French budget negotiations and central bank commentary could all generate opportunities for businesses looking to manage their currency exposure.

USD: Dollar momentum builds as markets price further Fed tightening

The dollar enters the week with considerable momentum, having gained approximately 3% over the past month. A combination of restrictive Federal Reserve policy, geopolitical uncertainty and inflation risks continues to underpin demand, with expectations of another US interest rate increase in December strengthening following September's tightening.

Attention now shifts to Wednesday's US inflation report, where headline CPI is expected to accelerate to 3.6% from 3.4%. A reading in line with forecasts would likely reinforce expectations of further Fed tightening, potentially providing another boost to the dollar. Investors will also assess comments from several Federal Reserve officials, particularly Tom Barkin and Michelle Bowman, for indications of how broadly support for additional rate increases extends across the committee.

The geopolitical backdrop remains supportive of the dollar, although reports of a potential energy ceasefire between Russia and Ukraine introduce some uncertainty around the outlook for oil prices. With the dollar index holding above 102, the technical picture remains constructive, leaving 102.85 as a potential upside target this week. A stronger-than-expected inflation reading could accelerate the move, while softer data may encourage some profit-taking following the recent rally.

GBP: Sterling holds its ground as UK growth takes centre stage

Sterling begins the week in a relatively strong position, particularly against the euro, with GBP/EUR maintaining levels around 1.18 following last week's breakout. The move represents an important technical development, with a sustained advance above this level potentially opening the door towards 1.20. However, momentum indicators suggest the rally may be becoming stretched, raising the possibility of a short-term pause before further gains emerge.

Much of sterling's recent outperformance reflects weakness elsewhere rather than a dramatic improvement in the UK's domestic outlook. Political uncertainty and fiscal pressures in France have weighed heavily on the euro, while comparatively resilient UK economic activity has provided some support for the pound.

Against the dollar, GBP/USD has remained notably steady above 1.32 despite the greenback's broader strength. This resilience reflects supportive interest rate differentials and an economy that has continued to exceed expectations.

The next major test comes from this week's UK GDP figures. Another positive surprise could strengthen confidence in the pound and reinforce expectations that the Bank of England will maintain a restrictive policy stance. Conversely, disappointing growth could challenge current interest rate expectations and leave sterling vulnerable, particularly against a strengthening dollar.

EUR: French fiscal uncertainty keeps the euro under pressure

The euro continues to face a difficult trading environment, with EUR/USD hovering around the psychologically important 1.12 level after falling more than 1% this month. The combination of dollar strength, geopolitical disruption and mounting concerns over French public finances has pushed the pair towards its weakest levels since May 2025.

France's budget negotiations are set to dominate the European agenda this week, with the government's proposed €43 billion savings package facing considerable parliamentary resistance. The absence of a stable governing majority has raised doubts over the likelihood of a straightforward agreement, while uncertainty surrounding the legislative process continues to weigh on investor confidence.

Positioning data also reflects increasingly negative sentiment towards the single currency, with speculative investors holding substantial bearish exposure. Although stretched positioning creates some potential for a temporary rebound, the broader fundamental picture remains challenging. A sustained break below 1.12 could expose EUR/USD to further losses towards the 1.1100 to 1.1120 region.

Elsewhere, EUR/CHF remains sensitive to French bond market developments and the outlook for European Central Bank policy. Eurozone inflation, expected to be confirmed at 3.8% for September, continues to support expectations of further monetary tightening. Nevertheless, widening French-German government bond spreads could place renewed pressure on the euro, potentially pushing EUR/CHF towards 0.9230 to 0.9250. An improvement in sentiment could instead encourage a recovery towards 0.9350 to 0.9400.

Looking ahead

• Monday, 12 October | US market holiday: Columbus Day is expected to reduce trading activity, although geopolitical headlines could still trigger currency movements.

• Tuesday, 13 October | French budget negotiations: Parliamentary discussions over the proposed €43 billion savings package could drive volatility in EUR/USD and GBP/EUR.

• Wednesday, 14 October | US inflation: September CPI is forecast to rise to 3.6%, with the release likely to influence December Federal Reserve rate expectations and the dollar's near-term direction.

• UK GDP figures: The latest growth data will test sterling's resilience and could influence expectations for the Bank of England's next policy decision.

• Federal Reserve commentary: Speeches from senior policymakers, including Tom Barkin and Michelle Bowman, will provide further insight into the likelihood of additional tightening.

• Eurozone inflation: Confirmation of September's 3.8% inflation reading will help shape expectations for the European Central Bank.

• Global economic outlook: The IMF's latest World Economic Outlook will offer an updated assessment of global growth and inflation risks.

• US corporate earnings: Third-quarter results from major US banks will provide an early indication of economic resilience and broader investor sentiment.