• USD Momentum: U.S. equity markets are on the rise with expectations of swift policy action if Trump takes office, supporting a dollar bull trend and heightened FX market volatility.
• Dollar Strength: Investors are positioning and hedging for a stronger dollar, with the DXY index facing resistance at 105.70 and aiming toward yearly highs of 106.50.
• Widening EUR Spread: The euro-dollar spread (“Atlantic spread”) has widened, favoring the dollar with two-year swap differentials exceeding 180 basis points, pushing EUR/USD toward a target of 1.05.
• Rising Euro Volatility: EUR/USD volatility is rebounding, and ECB speakers today are unlikely to halt expectations of a December rate cut of 25–50 basis points.
• UK Focus on BoE’s Huw Pill: Despite stronger UK earnings data, the market awaits BoE Chief Economist Huw Pill’s stance, which could confirm a mild rate cut path, likely keeping EUR/GBP below 0.8300.

USD: Riding the Momentum

U.S. equity markets remain on an upward path, driven by expectations that, unlike in 2016, a well-prepared Donald Trump will take swift action if he assumes office. This readiness fuels the so-called “Trump trades” and counters the notion that it could take a year to see substantial policy implementation, as it did in 2017.

This sentiment is already affecting the FX options market, where volatility levels dropped sharply last Wednesday following Republican electoral successes. With a significant political event out of the way, some expected the market to stall until the next major shift. However, signs are pointing to an early engagement in a dollar bull trend, as volatility rises with active positioning (by investors) and hedging (by corporate treasurers) in anticipation of a stronger dollar. It seems wise not to resist this emerging trend.

Today, attention turns to the October update of the NFIB small business optimism index, expected to rise following Republican wins and potential corporate tax implications. Later, the Fed’s Christopher Waller is set to speak, likely reinforcing Fed Chair Jerome Powell’s recent stance, avoiding policy speculation related to any Trump agenda.

The DXY index faces resistance near 105.70, but all eyes are on yearly highs around 106.50.

EUR: The ‘Atlantic Spread’ Widens

The so-called “Atlantic spread” between the euro and dollar continues to expand, with two-year EUR

swap differentials now exceeding 180 basis points in the dollar’s favor. The last time the gap was this wide was in 2022, a period when EUR/USD approached parity, largely due to high energy prices and euro-negative trade conditions that aren’t relevant today.

EUR/USD appears poised to test 1.0600, and an end-of-year target at 1.05 is within sight. One-month implied volatility for EUR/USD is climbing back up to around 8%, after dipping to 6.5% last week. On the European side, ECB officials Olli Rehn and Robert Holzmann are speaking today, but are unlikely to deter expectations for an ECB rate cut in December—whether that cut will be 25 or 50 basis points remains in question, with markets pricing in around 30 basis points, while some analysts project a 50-point cut.

GBP: Spotlight on Huw Pill’s Outlook

Today’s UK earnings data for September came in stronger than anticipated, suggesting a slowdown in the downward trend for private sector pay. However, this dataset has lost some significance for the Bank of England (BoE) and the market.

Of greater interest today is Chief Economist Huw Pill’s appearance at a 10CET panel titled “Reversing the Great Global Tightening – How Far and How Fast?” Pill, who opposed the BoE’s August rate cut, leans toward a more hawkish stance. The market currently anticipates only a mild easing cycle from the BoE next year, with just three rate cuts projected. Without major surprises from Pill, this outlook should remain stable, likely keeping EUR/GBP below 0.8300/8315 and pushing it lower.