US Inflation in Focus as Dollar Pulls Back and Sterling Strengthens.

USD – The dollar reversed Monday’s gains as market sentiment improved and European currencies recovered. Fed commentary suggests a possible rate hike this quarter, but fewer increases next year. Today’s US CPI inflation report is the main focus, with inflation expected to rise to 3.6%.

EUR – The euro has recovered from recent lows but remains under pressure from French budget concerns and ongoing uncertainty in bond markets. With little progress on France’s budget, a stronger recovery remains difficult, while ECB commentary and US inflation data are in focus.

GBP – Sterling has strengthened against the dollar, reaching a one-week high, while remaining strong against the euro. With no major UK data due today, attention turns to US inflation figures and comments from Bank of England Chief Economist Huw Pill. Markets are increasingly expecting a November rate hike, with the probability now at 93%.

USD: The dollar reversed Monday’s gains yesterday as market sentiment improved and European currencies recovered. Fed official Williams indicated that he still expects another interest rate hike this quarter but does not anticipate further tightening next year. However, markets continue to price in two rate hikes in the first half of 2027. Today’s main focus is the US September CPI inflation report, with annual inflation expected to rise from 3.4% to 3.6%, driven by a forecast 0.6% monthly increase. Higher-than-expected inflation could support the dollar, while a weaker reading may put it under pressure. Speeches from Fed officials Barkin and Goolsbee are also on the agenda.

EUR: The euro recovered from its lows late Monday but is struggling to make further gains following the recent French bond selloff. Ongoing concerns surrounding France’s budget and political uncertainty continue to weigh on the single currency, limiting its recovery. US inflation data will be the main market focus today, while speeches from European Central Bank officials, including President Lagarde and Schnabel, could provide further insight into the outlook for interest rates. Developments in France’s public finances remain a key factor for the euro.

GBP: Sterling has strengthened against the US dollar, rising around 0.5% to a one-week high, while continuing to perform well against the euro. With no major UK economic data due today, attention will turn to the US CPI inflation report, which could influence wider currency markets. Bank of England Chief Economist Huw Pill is also due to speak. Meanwhile, market expectations for a UK interest rate hike in November have continued to rise, with the probability now at 93%. These expectations could support sterling, although upcoming economic data and comments from central bank officials will remain important.

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