USD: Dollar Strength Builds on Shifting Fundamentals

The US dollar extended its advance on Thursday, with the Dollar Index (DXY) pushing through the 99 mark to reach its highest level in two months. The latest rebound initially drew strength from yen and euro softness but has since taken on a life of its own, even as risk sentiment steadied. Rather than being forced to confront its own economic fragilities, notably signs of a cooling labour market, the dollar has instead sidestepped them.

Fresh analysis from the Federal Reserve Bank of Dallas added a new dimension to the debate, suggesting that slower immigration trends mean the United States may now require smaller job gains to maintain stable unemployment. This nuance offers a fresh interpretation of recent payroll weakness, perhaps signalling adjustment rather than outright deterioration.

In effect, the dollar’s resilience reflects a broader market rethink that risks confronting the Fed and the wider economy are tilting more towards inflation than unemployment. The implication is that weaker data may not necessarily translate into a dovish shift. Combined with structural labour changes from technology and demographics, the greenback appears increasingly well placed for a more durable recovery heading into 2026.

GBP: Sterling Slips as Business Confidence Falters

Sterling fell sharply on Thursday, with GBP/USD dropping 0.8% to test key technical support near 1.33, its second-largest daily decline in over two months. The move comes as dollar demand strengthens and global risk sentiment deteriorates. Should the 200-day exponential moving average fail to hold, the next support sits close to 1.3170.

Momentum indicators suggest a pause could be near, with the 14-day relative strength index approaching oversold territory. However, with investor sentiment turning increasingly defensive and positioning favouring the dollar, sterling may struggle to recover without a new catalyst.

Domestic data provided only limited relief. A survey from the Recruitment & Employment Confederation and KPMG showed that hiring fell at the slowest pace in a year, while pay growth eased to its weakest since 2020. These signs point to a labour market that is stabilising, though not yet improving. The Bank of England faces a delicate balance as inflation concerns re-emerge.

The latest quarterly survey from the British Chambers of Commerce offered a sobering snapshot of business sentiment. Only 48% of firms expect turnover to rise over the next 12 months, while 21% foresee a decline. Taxation and inflation remain the main sources of concern, particularly following April’s rise in National Insurance contributions. Inflation worries are intensifying, with 57% of firms now identifying it as a key issue, the highest level since early 2024.

These findings reinforce Chief Economist Huw Pill’s recent comments that the Bank must prioritise the fight against inflation. With another fiscally tight budget expected in late November and business investment intentions weakening, the pound looks set to remain under pressure in the near term.

EUR: Euro Weakens as Policy Flexibility Takes Centre Stage

The euro’s decline extended into a fourth consecutive session, with EUR/USD slipping below key support at 1.16 to reach two-month lows. The move followed the release of the European Central Bank’s latest meeting minutes, which revealed that policymakers had considered another rate cut in September. While the decision was ultimately to hold steady, the discussion highlighted the ECB’s continued flexibility and its willingness to act if inflation undershoots.

Although inflation is near target, officials remain cautious about downside risks, particularly those arising from external pressures such as trade tensions or geopolitical shocks. However, inflation driven by supply-side factors may prove temporary, potentially prompting further easing if growth fails to strengthen.

The euro’s losses were compounded by developments in the United States, with the Dallas Fed’s research reframing concerns over the US labour market. The analysis suggested that recent weakness in job creation may not be as troubling as first thought, leading investors to reassess expectations for monetary divergence between the Fed and the ECB. As a result, the euro now faces renewed pressure from both sides of the Atlantic.

Looking Ahead

Markets are entering a period of adjustment, where sentiment rather than data may steer direction. The dollar remains well supported as inflation concerns dominate, while the euro and sterling face persistent headwinds from subdued growth and policy uncertainty.

If upcoming US data confirm that the Fed can maintain higher interest rates without threatening employment, the dollar’s upward momentum could continue into year-end. For Europe and the United Kingdom, a sustained recovery will likely require clearer signs of economic resilience or a decisive shift in central bank guidance.