USD: Dollar slips on cautious Fed tone and growing political risk

Dollar bulls may have to hold their nerve for a while longer. The greenback has extended its decline, notching up four consecutive daily losses. It remains marginally higher for the month overall, yet it is still trading within a tight range that has persisted since late May. In contrast, both the yen and the euro have found some relief, making the most of the softer dollar backdrop.

The Beige Book, released on Wednesday, depicted an economy that is treading water, with growth neither accelerating nor collapsing. This reinforced the cautious message from Federal Reserve officials, who continue to signal a gradual approach to policy easing. Political uncertainty has also intensified. Betting markets now suggest a probability of more than seventy percent that a government shutdown could persist for over a month. Against this mix of sluggish growth, stubborn inflation and rising political friction, investors are almost fully pricing in two further rate cuts before the end of the year, even before next week’s closely watched inflation report.

The October Beige Book painted a mixed picture. Overall activity was broadly unchanged, with three Districts reporting modest growth and four showing slight declines. Consumer spending has cooled, especially among lower and middle-income households, who are becoming more price sensitive and cautious. Higher earners have continued to spend on premium services, though this has not been enough to lift overall consumption. Sector performance has been muted. Agriculture, energy and transport weakened, while manufacturing continued to struggle under higher tariffs and softer demand. Real estate remained uneven, although business lending showed some improvement thanks to lower borrowing costs.

Labour market conditions were similarly lacklustre. Employment levels held steady, but firms reported softer labour demand and some have reduced headcounts through layoffs or attrition. A noteworthy development was the growing use of artificial intelligence, which some employers cited as a reason for hiring less. Labour supply has improved, allowing companies to rely more on temporary and part-time workers. Wage growth remains modest to moderate, supported in part by rising costs for employers, particularly in healthcare, where insurance expenses have increased sharply. Inflationary pressures persist, with higher import costs and rising service expenses keeping inflation above the Fed’s two percent target.

Within this environment, the Federal Reserve appears ready to deliver another quarter-point cut in October. Governor Christopher Waller, who is widely viewed as a potential successor to Jerome Powell, has called for a measured approach, urging policymakers to “go carefully, do twenty-five, and wait to see what happens.” His stance mirrors Powell’s recent communication. Governor Stephen Miran has argued for a larger half-point reduction, citing trade tensions with China as a downside risk if monetary policy remains too restrictive, though he acknowledges that the majority is likely to favour the smaller cut.

Waller’s recent discussion with Treasury Secretary Scott Bessent highlights both the delicate balancing act facing the Fed and the potential shift in leadership that could shape future strategy. The stakes are clearly rising as the central bank seeks to sustain growth while containing inflationary risks.

 

GBP: Temporary lift against a challenging backdrop

Sterling moved higher against the dollar, recovering from proximity to the 200-day moving average, a level previously identified as a key point of vulnerability. The pound enjoyed a relatively steady week against other major currencies, supported by the lack of any fresh signs of a worsening economic picture. However, towards the end of the week it gave back some gains, particularly against the Swiss franc and the yen, as risk-off sentiment linked to US fiscal tensions spread through markets.

Positioning remains broadly negative on sterling, which means that even modest data surprises can trigger short-term rallies. That was the case this week. Yet the improvement looks temporary. The GDP result matched expectations, providing a short-lived boost but doing little to alter the UK’s wider economic challenges. It has not created the fiscal breathing space needed for a more comfortable policy environment.

Further tax rises are expected in the November budget, and these are likely to put additional strain on already fragile growth dynamics. The fiscal position remains exceptionally tight by historical standards, limiting the government’s flexibility and keeping the currency’s broader outlook clouded.

 

EUR: Recovery extends but key resistance lies ahead

The euro has gained nearly one percent this week against the dollar, recovering smartly after two unsettled weeks. Political developments in France have helped. Lecornu’s successful vote of confidence has provided reassurance to investors and contributed to a firmer tone in the single currency. The focus now shifts towards early October resistance levels around 1.1750 to 1.1770.

However, this recovery has not been driven by French politics alone. Sentiment in the United States has shifted as well, even without a flow of new economic data during the government shutdown. Concerns over credit standards have resurfaced after two regional banks disclosed issues related to fraudulent loans, heightening worries about excess in the equity rally and renewed trade tensions. The resulting risk-off mood, combined with the Fed’s dovish communication, has weakened the dollar further.

The decline in the dollar has occurred alongside a rally in Treasuries, with the two-year yield falling to its lowest point since 2022. This suggests that demand for US assets remains firm, and that the move reflects positioning and sentiment rather than a sharp deterioration in fundamentals.

The familiar dovish tilt from the Fed has anchored the euro-dollar pair close to 1.18, and we expect the recent gap to close relatively swiftly given current dynamics. For the pair to break above the year-to-date peak of 1.1919, US conditions would need to worsen significantly, either through a renewed escalation of trade tensions or a marked deterioration in credit quality. Neither outcome appears likely at present.

With two rate cuts already priced in and the Fed’s approach expected to remain cautious, there seems limited scope for rate differentials to support a further sustained rise in EUR/USD. The Fed will enter its pre-meeting blackout period on Saturday 18 October, and the upcoming inflation figures are likely to temper expectations of additional cuts beyond what is already anticipated.