USD: Fed Delivers a Cautious Cut, Dollar Finds Its Feet

The Federal Open Market Committee voted 10–2 to lower the target range by 25 basis points to 3.75–4.00%. The decision, though expected, was interpreted as broadly supportive for the US dollar, with the DXY closing 0.5% higher. The tone was reminiscent of September’s move – a carefully calibrated cut, with December still portrayed as uncertain rather than inevitable.

The Fed also announced it will halt its balance sheet runoff from 1 December, concluding a two-year reduction that trimmed more than $2 trillion in assets. Policymakers highlighted steady economic expansion driven by resilient consumer spending, even as tariff-related price pressures persist.

Chair Powell noted that labour market cooling has stemmed largely from structural supply-side constraints, including lower immigration, rather than outright weakness. Importantly, the Fed is leaning more heavily on private and alternative data sources to compensate for gaps caused by the ongoing government shutdown. This approach lent the overall message a firmer, more assured tone than markets had priced in.

Positive trade headlines reinforced sentiment. During President Trump’s visit to Asia, the US finalised a trade pact with South Korea involving $350 billion in combined investment commitments and a tariff cap at 15%. Talks with China are progressing, with agreement reached on cooperation over fentanyl control, agriculture, and digital platforms. The US also extended its suspension of reciprocal tariffs for another year.

Against this backdrop, the dollar looks better supported near the 99 level, though further gains will likely require confirmation from official economic data once released.

GBP: Fiscal Jitters Pressure Sterling

Sterling remains under significant strain, down 1.8% against the dollar this month and at a two-year low versus the euro. The currency is heading for its longest losing streak against the common currency in almost a decade, reflecting deepening concerns over the UK’s fiscal outlook ahead of November’s Budget and mounting expectations of a Bank of England rate cut.

The Office for Budget Responsibility is expected to downgrade productivity forecasts, leaving a potential £25–30bn gap in the public finances. Chancellor Reeves may therefore be forced into tax rises or spending restraint at a time when growth is already sluggish. The resulting drop in gilt yields has eroded sterling’s yield advantage and strengthened the case for policy easing.

Recent inflation data add to that narrative, with UK food prices seeing their largest monthly fall since 2020. Despite this, technical indicators now suggest sterling is oversold. GBP/EUR has slipped 0.8% this week to 1.1345 – its weakest level since May 2023 – with relative strength and stochastic metrics both flashing oversold signals. While any rebound is likely to be modest, a corrective move toward 1.1410–1.1430 looks plausible, offering tactical opportunities for near-term buyers.

EUR: ECB Meeting Unlikely to Shift the Dial

EUR/USD briefly dipped below 1.16 following the Fed meeting before retracing. Rate expectations alone appear insufficient to drive a sustained move lower. Support near 1.16 remains firm and would likely only give way if US macro data surprise meaningfully to the upside once the shutdown ends.

Today’s ECB meeting is the key focus, but no significant policy change is expected. The recent data flow has been mixed – with upbeat PMI and Ifo readings offset by weak production and consumption figures. Inflation remains the central concern, and while September’s print was steady, downside risks from a stronger euro and softer energy prices have stirred debate over a potential December cut. For now, EUR/USD is expected to hold close to current levels around 1.16.

Looking ahead

Markets now turn to incoming hard data for confirmation of the Fed’s cautious optimism. With the dollar finding support from policy divergence and improving trade sentiment, attention will soon shift to whether these tailwinds can endure once fiscal risks in the UK and soft eurozone growth reassert themselves. In the near term, the dollar’s bias remains upward, but conviction will depend on evidence that the underlying US economy is indeed as resilient as the Fed suggests.