Dollar Takes a Breather, Euro Finds Support, and Sterling Ignores the Storm Clouds.
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USD: Dollar momentum cools as FOMC minutes fail to inspire; rangebound trading likely between 98.50–99.00.
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Equities: Risk appetite supported by peace optimism and AI-related gains, though corporate credit cracks are worth watching.
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EUR: French political stability gives the euro short-term support; ECB minutes likely to reinforce a cautious tone.
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GBP: Sterling remains strong despite rising UK recession risks and weak economic fundamentals.
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Outlook: Currency markets may stay rangebound this week with limited fresh catalysts ahead.
USD: Dollar Rally Stalls Despite FOMC Minutes
After a strong run, the dollar’s momentum appears to be fading. The much-anticipated FOMC minutes, while containing the usual hawkish undertones, failed to lift either the dollar or short-dated U.S. yields overnight. Reading between the lines, the Fed remains confident in U.S. growth but is cautious about fuelling higher unemployment. Once the government shutdown concludes, fresh labour data will offer a clearer picture of recent job trends.
Global equities remain in good spirits, helped by easing geopolitical tensions and optimism over a potential Middle East peace deal. China’s post-holiday reopening and upbeat sales results from TSMC have kept the AI-driven equity rally alive. However, cracks are emerging beneath the surface — notably the September bankruptcy of U.S. auto parts firm First Brands and Jefferies Financial’s subsequent 22% share price drop due to exposure concerns. For now, markets see this as an isolated case, with high-yield spreads such as the iTraxx Cross-Over Index staying near yearly lows — but it’s a situation worth tracking.
With limited catalysts today, the dollar may consolidate as the euro stabilises. Expect DXY to trade in a 98.50–99.00 range near term.
EUR: French Politics Offer a Temporary Lifeline
The euro found some relief overnight following reports from former PM Sébastien Lecornu that President Macron could name a new prime minister by Friday. Markets, previously bracing for divisive snap elections, took comfort in the surprise development. Betting markets now show just a 37% chance of elections by month-end, sharply down from 70% yesterday. The news has lifted EUR/USD off the 1.1600 floor and allowed EUR/CHF to rebound from 0.9300.
The French–German OAT–Bund spread, which had spiked earlier this week, has eased back to the low-80s. This political reprieve should help the euro hold steady until the weekend.
Attention now turns to the ECB’s meeting minutes, expected to confirm that rates are “in a good place” but that the central bank remains ready to act if needed. Risks lean toward weaker growth and softer inflation, suggesting that another rate cut remains on the table — albeit not fully priced in.
EUR/USD should hold its two-month range near 1.1580–1.1600; if support fails, a slide toward 1.1500 could follow.
GBP: Sterling Strength Defies the UK’s Economic Reality
Sterling’s recent performance seems driven almost entirely by U.S. dollar sentiment, with markets largely ignoring the UK’s deteriorating fundamentals. Rising unemployment, higher National Insurance contributions, sluggish investment, and fiscal drag all point toward a stagflationary backdrop. Adding to the gloom, GDP projections for 2026 have been revised down yet again.
While some of these headwinds haven’t fully materialised, the pound’s resilience near 1.34 looks misplaced — especially given the weak domestic picture and the lack of any supportive UK-specific drivers. For now, GBP/USD appears overvalued, buoyed more by a soft dollar than by genuine optimism for the UK economy.