USD: Signs of a trade truce and growing bets on Federal Reserve easing

A number of upbeat developments are bolstering risk appetite and may limit further strength in the US dollar. Global equity markets are climbing higher, with the S&P 500 closing at a record high, underpinned by falling bond yields and an improved inflation outlook. Expectations that Donald Trump and Xi Jinping will meet this week have added momentum, as signs emerge of a trade deal that could ease supply-chain and tariff pressures.

September’s consumer price data added further weight to the argument for Fed easing. While headline inflation cooled, core inflation excluding autos and shelter remains close to 4 per cent. If the Fed were ready to cut rates this week despite elevated readings, the latest figure simply bolsters that possibility. However one could argue there is a ceiling on how far the Fed can go beyond the roughly 50 basis-points of cuts currently priced in for year-end 2025, unless labour-market data deteriorates.

It is also worth noting that flash purchasing-managers’ indices held up quite well — arguably more important given the resumption of the Fed’s cutting cycle depends on labour-market vulnerabilities. With a 25 basis-points rate cut now largely priced in, the real question for the upcoming Federal Open Market Committee meeting is whether the Fed will halt quantitative tightening immediately. There are signals that reserves are approaching an “ample” threshold, and an early pause to QT could place further downward pressure on the US dollar.

EUR: European Central Bank in the comfort zone

The ECB is widely expected to leave policy unchanged this week, offering no fresh signals for the market. While risks remain tilted to the downside, recent data from the euro-area point towards a “wait and see” policy posture.

Inflation remains modest, supporting the idea of no further cuts. Meanwhile euro-zone PMIs showed broad improvement across manufacturing, services, new orders and employment — although the recovery remains patchy. Gains were concentrated in German services, while French manufacturing continued to lag. Still the overall resilience, particularly in the labour market, should help contain inflation risks and justify the ECB’s cautious stance.

For the euro the outlook is broadly favourable as the Fed continues to ease, narrowing the EZ-US interest-rate differential. The softer US inflation print last Friday helped the EUR/USD pair hold above $1.16 and maintain its year-to-date gain of about 12 per cent. On a monthly basis however the euro is trading lower — on track for a roughly 1 per cent decline, having touched just above $1.19 in September.

Looking ahead this week brings the ECB meeting, plus a batch of euro-zone data including Q3 GDP, flash October inflation and sentiment indicators from Germany. We remain alert to dovish surprises or disappointment that could weaken the euro below its $1.16 support.

GBP: Mixed macro signals muddy the outlook

Sterling’s performance last week was uneven as mixed macroeconomic signals blurred the direction. Softer UK inflation has revived expectations for a Bank of England rate cut in December — markets are pricing in roughly a 70 per cent chance — and front-end gilts rallied in response. However stronger retail sales and higher consumer confidence point to underlying economic resilience, which tempers the dovish case.

Despite the increased probability of easing, the UK’s relatively elevated terminal rate continues to provide support for the pound. GBP/USD remains above its 200-day moving average near $1.32, a key technical threshold. A decisive break below could open the path towards $1.31 and perhaps $1.30. Options markets are showing rising demand for downside protection ahead of the November Budget, underscoring fragile sentiment.

The cross rate GBP/EUR remains stuck in a sideways trading pattern, with €1.1430 as its next support. Up-moves have lacked conviction and fresh lows appear increasingly likely. Traders are expected to remain cautious ahead of major global events including the Fed decision, the Trump-Xi meeting and a host of data releases.

Watch out this week for the October Lloyds Banking Group Business Barometer on Friday. After soft inflation, robust retail sales and resilient PMIs, this survey will help gauge momentum. We remain of the view that the Bank of England will not cut rates in November. However the UK Budget looms large and remains the main risk event — fiscal credibility is dominating the narrative and the pound is more sensitive to concerns about stability than yield differentials.

The week ahead

The coming days will feature several pivotal data releases and central-bank developments that could guide market direction across major economies. In the United States, investors will focus on fresh readings for services activity and inflation expectations, as well as commentary from Federal Reserve officials. Softer data could strengthen the argument for further policy easing and weigh on the dollar, particularly if the Fed signals that quantitative tightening may end sooner than expected. On the other hand, stronger-than-anticipated numbers would push Treasury yields higher and restore some support for the greenback.

In the United Kingdom, attention will turn to the October Lloyds Business Barometer, which should provide a clearer sense of business sentiment following recent mixed macro data. A subdued reading would reinforce expectations of a policy shift later in the year, while resilience could support the pound temporarily. The approaching UK Budget adds a layer of uncertainty, as any signs of fiscal loosening or credibility concerns could unsettle gilt markets and weigh on sterling.

Across the euro-zone, the spotlight will be on Q3 GDP figures, the flash October inflation estimate and sentiment surveys from Germany. A weaker-than-expected growth or inflation outcome would bolster expectations that the ECB remains firmly in wait-and-see mode, which could restrain the euro. Conversely, evidence of a broader economic rebound might revive interest in European assets and support the currency.

Overall, markets are entering a week where monetary-policy expectations and fresh data will interact closely. If global data continue to soften and policymakers lean towards accommodation, the dollar is likely to lose further ground, supporting both the euro and sterling while lifting risk assets such as equities. However, stronger-than-expected figures, particularly in the United States, could revive the dollar’s momentum, dampen risk appetite and drive bond yields higher. Volatility looks set to remain elevated as investors weigh the balance between monetary easing hopes and the durability of the recent risk rally.