US Dollar Resilience, Euro’s Italian Budget Concern, and GBP’s Uptrend.

USD: The US dollar maintains its strength as it faces increasing yields and growing tensions in the Middle East. This comes after US Federal Reserve Chair Jerome Powell refrained from suggesting that US interest rates have reached their peak. While Powell acknowledged the impact of tighter financial conditions, he didn’t rule out the possibility of further tightening due to the strong economy and tight job market. However, he did acknowledge that rising yields could reduce the need for additional rate hikes. Overall, Powell’s tone leaned slightly dovish, although the door to further tightening remains ajar. The market is currently pricing in a high likelihood that the Fed will keep interest rates steady at its October 31-November 1 meeting.

EUR: The euro lacks significant local drivers this week, but it has shown resilience in the face of increasing US yields and has made progress against the British pound. The euro faced a potential concern when the Italian government approved the 2024 fiscal budget, which includes tax cuts and increased spending funded by borrowing. Additionally, Italy recorded its worst budget deficit for the month of September, and yield spreads have widened, with the BTP-Bund spread exceeding 200 basis points.

GBP: The EUR/GBP pair is breaking away from its previous range, with the recent uptrend testing a former support zone, now acting as resistance. The pair has struggled to maintain a broader trading range in the past but is now building on its recent bullish momentum. The movement doesn’t seem to be primarily influenced by EU-related factors but is more a result of worsening fundamental data in the UK. Earlier this week, UK wage growth was slower than expected, which may be seen as positive news for the Bank of England. On Tuesday, UK unemployment data is expected to show further labor market improvements, which could drive the pair even higher. Resistance is anticipated around 0.8725 after breaking above 0.8702 (keep an eye on a daily chart close above this level). It’s worth noting that the pair is trading above the 200-day simple moving average, which is often seen as a trend filter, suggesting that its range-bound behavior might be a thing of the past. Support can be found at 0.8635.