USD: Dollar Steadies but Outlook Softens

The dollar trimmed earlier losses during Friday’s London session after President Trump admitted that his proposed tariff hikes on China would be unsustainable. National Economic Council Director Kevin Hassett expressed “strong confidence” that discussions with Chinese officials could soon help restore a more balanced trade relationship. This marked a notable change in tone, given Trump’s earlier threat to impose 100 per cent tariffs on Chinese imports by November and his suggestion that he might cancel a planned meeting with President Xi later this month.

Initially, the comments placed moderate downward pressure on the dollar, although volatility remains elevated as the government shutdown continues to amplify market reactions to headlines. Beneath these sentiment-driven swings, the Federal Reserve’s dovish stance remains the main source of downward pressure on the greenback, limiting the scope for any sustained recovery.

The dollar index is currently trading slightly above its fair value when compared with rate differentials across its major peers, suggesting limited upside potential. Traders are now focused on Friday’s inflation figures, which represent the first major data release since the shutdown began, as the Bureau of Labor Statistics continues its efforts to compile the data. With the Fed now in its blackout period, markets are left to interpret the inflation reading as a key guide ahead of the next policy meeting.

GBP: Inflation Report Takes Centre Stage

Sterling traders are now turning their attention to Wednesday’s UK inflation report, which remains a crucial event for the Bank of England. Despite signals from policymakers that a rate cut is possible, persistently high price pressures, fuelled in part by robust wage growth, continue to complicate any shift towards a more dovish stance.

Headline CPI is expected to rise to 4 per cent, driven mainly by higher fuel costs, while services inflation is forecast to remain steady. Even if these pressures are largely supply-based, markets are likely to react to the headline figure itself, meaning that a strong reading could give sterling a temporary boost.

Last week, the pound ended higher against the euro, recovering 0.5 per cent from Friday’s low of 1.1466 to close at 1.1519. Sterling’s late-week rally came as risk appetite improved, with investors reassured that concerns over bad loans in the US banking sector were confined to a few smaller lenders. The 21-day moving average remains a key resistance level for GBP/USD, keeping the pair within its recent range. Strong inflation data could push sterling higher in the short term, while a softer print would likely revive expectations of a December rate cut and weigh on the currency, although the downside may be limited given how much negative sentiment is already priced in.

EUR: Holding Firm Against the Dollar

The euro finished last week 0.7 per cent stronger against the dollar after pulling back from resistance near 1.1720. The euro’s gains were largely a reflection of the dollar’s weaker tone rather than any decisive improvement in eurozone fundamentals.

ECB President Christine Lagarde stated that the outlook for inflation remains uncertain but noted that both upside and downside risks have narrowed. Although her comments were broadly neutral, they imply that any future surprises, whether positive or negative, could have a greater influence on expectations for monetary policy.

Revised eurozone figures showed core inflation rising slightly to 2.4 per cent year-on-year from 2.3 per cent, reinforcing expectations that the ECB will maintain current policy settings for the time being. With the Federal Reserve leaning dovish and the ECB holding a steadier line, interest rate differentials continue to favour the euro modestly. While EUR/USD could climb a little higher in the coming days, the 1.1750 level remains a strong short-term barrier.

Looking Ahead

This week’s trading is likely to be driven by inflation data from both the United States and the United Kingdom, as these releases will help shape expectations for policy divergence between the Federal Reserve and the Bank of England. Meanwhile, the eurozone’s relatively stable backdrop may allow the single currency to hold its recent gains.

Overall, the dollar appears set for a mild downward adjustment, sterling’s direction will depend heavily on Wednesday’s CPI figures, and the euro looks likely to maintain its footing unless a significant shift in risk sentiment alters the market landscape.