FX Daily Outlook: Dollar Weakens as Rate Hike Bets Fade, Sterling Outperforms.

USD – The dollar weakened overnight despite hotter PPI inflation of 6.3%, as comments from Fed Chair Warsh dampened October rate hike expectations. Markets now price in a 12.5% chance of a hike, with September industrial production in focus today.

EUR – The euro has rebounded almost 1.2% from Wednesday’s 17-month low against the dollar. French bond concerns continue to weigh on the currency, while this morning’s final eurozone CPI reading is expected to confirm inflation at 3.8%.

GBP – Sterling is outperforming against both the dollar and the euro, supported by signals of UK fiscal consolidation and higher taxes on banks. BoE Governor Bailey’s comments on energy-driven inflation remain in focus following his speech at the IMF meetings.

USD: The dollar is trading on the softer side this morning, despite another hotter-than-expected inflation report yesterday, with year-on-year PPI surging from 5.4% to 6.3%. However, expectations for an October rate hike have fallen following comments from Fed Chair Warsh at the IMF summit, where he said the economy was developing as he had expected at the previous meeting. Markets now price in just a 12.5% chance of a hike, contributing to broad dollar weakness overnight. Today’s data calendar is quieter, with September industrial production the main release to watch. Attention will also remain on the final days of the IMF summit, where further comments from policymakers could influence expectations for the Federal Reserve’s next move.

EUR: The euro has recovered strongly against the dollar since hitting a fresh 17-month low following Wednesday’s US CPI release, with EURUSD rising by almost 1.2%. However, ongoing concerns surrounding French government bonds continue to place downward pressure on the pair, limiting the euro’s recovery. This morning’s final eurozone CPI reading is expected to confirm September inflation at 3.8%. With limited other data to drive the currency, attention will remain on developments in France and shifting expectations for US interest rates. If markets continue to scale back expectations for a Federal Reserve rate hike, the euro could find further support in the near term.

GBP: Sterling is outperforming its major peers this morning, rising against both the dollar and the euro. Chancellor Healey has signalled plans to increase taxes on banks and pursue fiscal consolidation, developments that have helped bring 10-year yields lower in recent days. Bank of England Governor Bailey also spoke at the IMF meetings in Bangkok yesterday, warning that only time will tell whether higher energy prices will become entrenched in broader inflationary pressures. His comments highlight the ongoing uncertainty surrounding the UK inflation outlook and the Bank of England’s next policy move. With limited UK-specific developments highlighted today, sterling is likely to remain sensitive to broader market sentiment, movements in bond yields and changing expectations for US interest rates.