USD

Yesterday’s US economic data firmly favoured the dollar. Initial jobless claims fell to their lowest level since mid-July, according to the Labour Department, signalling a robust jobs market with very few layoffs. At 237,500, the four-week moving average also moved lower, reinforcing the view that the US economy is not on the brink of recession. Continuing claims held steady at 1.93 million after the previous week’s slight revision higher.

Meanwhile, second-quarter GDP was revised up to 3.8% from 3.3%, the strongest growth rate in nearly two years, driven largely by resilient consumer spending. Together with a series of hawkish comments from Federal Reserve officials, these figures have pushed the dollar almost 1% higher over the past week.

Our stance since August has been that the dollar would be harder to push lower. Much of the recent decline in USD had been linked to portfolio repositioning rather than any wholesale rejection of US assets. The ongoing strength of US growth, a still-cautious Federal Reserve, and the large fiscal deficit provide a sturdy floor for the currency. In short, the dollar now reacts more to tangible economic outcomes than to hopes of dovish Fed policy alone.

Markets had expected last week’s Fed meeting to mark the start of further dollar weakness, but Chair Powell reminded investors that the policy path remains data-dependent, and that the rate cuts markets had priced in for later this year are far from guaranteed. Today’s core PCE inflation data will be watched closely. Underlying price pressures remain broad, with around 72% of CPI components still rising faster than 2% on an annualised basis — a sign that the inflation challenge is far from over.

GBP

Sterling has just endured its sharpest two-day fall against the US dollar since April, down 1.3% as rising UK gilt yields clash with a resurgent USD. From its 17 September high, GBP/USD has now shed nearly 3%, pulling the pair back toward monthly lows and forming a bearish technical pattern.

Long-dated UK yields have jumped, suggesting investors are increasingly concerned about the government’s long-term fiscal credibility. The 10-year gilt yield has risen to its highest level since early September, while the 30-year yield is nearing its 27-year peak of 5.75%. This move is being driven by ongoing gilt supply as the Bank of England unwinds its holdings, alongside soft demand at recent auctions.

Political risk is adding to the pound’s troubles. Andy Burnham, Mayor of Manchester, has now openly stated that he is considering challenging Prime Minister Keir Starmer. His pledges to significantly increase public spending, including £43 billion on welfare funded largely through borrowing, have alarmed markets already concerned about the UK’s debt trajectory. Investors still remember the turmoil caused by the 2022 mini-budget, and sterling historically weakens when fiscal credibility is in doubt.

A break below $1.34 would bring the September swing low at $1.3333 into view, followed by the 200-day EMA near $1.3254. A breach there would open the way towards August’s $1.3142 low.

EUR

The euro has dropped for two consecutive sessions, losing roughly 0.6% as investors recalibrate expectations following stronger US data. Yesterday’s upward GDP revision and lower jobless claims have shifted market sentiment towards a more hawkish Fed stance, weighing on the single currency.

The euro’s rally this year has been heavily dependent on dollar weakness. With US economic data consistently surprising to the upside, that support is now fading. The reduction of headline risk from tariff announcements has also removed a key driver that had previously fuelled euro strength.

If today’s US PCE and personal spending figures beat expectations, EUR/USD could break below support at $1.1650, with little technical support until $1.14 — a level last seen briefly in late July.

Looking Ahead

Today’s core PCE inflation release is the key event risk, as it could reinforce the Fed’s data-driven approach and keep expectations for near-term cuts in check. Strong readings may further support the dollar while putting pressure on both sterling and the euro.

For sterling, politics could take centre stage in the weeks ahead, with any confirmation of a leadership challenge likely to inject more volatility. In the eurozone, traders will focus on whether upcoming data can re-ignite confidence in growth and inflation, or if the ECB will be forced to adopt an even more cautious stance as the Fed remains relatively hawkish.