USD: Eyes on Inflation to Test Dollar Resilience

Markets remain largely unshaken by political developments, with the dollar strengthening even after President Trump’s decision to end trade discussions with Canada in response to an anti-tariff campaign. Investors appear to be looking beyond the headlines, confident that underlying fundamentals will prevail.

Today’s CPI release provides the next key test for the greenback. While the Federal Reserve looks set to deliver a rate cut next week, inflation figures may influence expectations for the months ahead. Policymakers have signalled comfort with the current disinflation trend but continue to stress data dependence. With no fresh labour data since the last meeting, assumptions have filled the gap, and markets are now treating a cut as near certain. However, a stickier core CPI could challenge the view that several cuts will follow before the second quarter of next year.

Consensus forecasts point to headline CPI at 0.4% month-on-month and core at 0.3%, with both expected to rise 3.1% year-on-year. Data reliability may be affected by missing price inputs following the shutdown, but softer survey indicators such as ISM and S&P PMIs suggest only modest price pressures. Input costs and service prices slowed in September, reinforcing the disinflation narrative. EUR/USD overnight volatility signals an expected move of about 50 tics. While CPI may not alter next week’s Fed decision, it could shape the policy outlook beyond that point, and in a market leaning dovish, even a modest upside surprise could shift positioning.

GBP: Strong Retail Data Challenges Dovish Sentiment

UK retail sales surprised to the upside in September, rising 0.5% month-on-month compared with an expected 0.4% fall. It marked the fourth consecutive increase, lifting sales volumes to their highest since July 2022 and providing a boost to sentiment around sterling.

This robust data reinforces the view that UK consumption remains resilient despite ongoing fiscal uncertainty and elevated inflation. It may also limit expectations for imminent Bank of England easing, particularly if upcoming PMI readings show similar resilience. Front-end gilts could face renewed selling pressure, pushing yields higher and offering near-term support for the pound as traders reassess recent dovish bets.

Earlier this week, softer inflation data drove a rally in short-dated gilts and lifted market pricing for a December rate cut to nearly 70 per cent. Yet inflation has held close to 3.8 per cent for three months, indicating stagnation rather than meaningful progress. Cutting rates while inflation remains sticky would push real rates negative, a difficult stance to justify. Sterling’s performance reflects the uncertainty: it has weakened over 3 per cent against the dollar and 1.5 per cent versus the euro during the second half of the year.

Options markets show rising demand for downside protection ahead of November’s Budget announcement. Technically, GBP/USD remains above its 200-day moving average near 1.32, with 1.31 and 1.30 acting as the next key support levels. EUR/GBP continues to fluctuate within a 0.8660 to 0.8720 range, caught between UK fiscal risks and political challenges within the euro area.

EUR: Awaiting Inflation and PMI Signals

The euro remains range-bound as traders await key data releases. EUR/USD is steady around 1.16, with positioning likely to keep it under slight pressure ahead of the US inflation figures. A stronger CPI print could weigh further on the pair, while a softer result would support a rebound and validate the Fed’s cautious stance.

Attention also turns to today’s flash PMI releases from France, Germany and the wider eurozone. These will offer additional insight into regional growth momentum. For now, the European Central Bank appears comfortable with current policy settings, providing a floor for the single currency even as sentiment fluctuates.

Looking Ahead

Markets are entering a crucial data window, with inflation and PMI releases shaping expectations for monetary policy in the months ahead. With volatility still compressed and positioning skewed towards dovish outcomes, any deviation from consensus, particularly in the United States, could trigger outsized market reactions. Investors remain focused on the data, not the distractions.