USD and EUR Under Pressure, GBP Faces Repricing.

• EUR/USD Outlook: EUR/USD is likely to remain under pressure, with risks skewed to the downside by the end of October due to expected ECB rate cuts and a widening USD short-term rate gap.
• ECB Developments: The focus this week is on ECB speakers, with hawkish and dovish members suggesting potential for an October rate cut, already priced in by markets with 23bp expected next week.
• USD Strength: The US jobs report has strengthened the dollar, aligning markets with Federal Reserve projections for 25bp cuts in November and December, reducing the likelihood of dovish shifts until more data arrives.
• Global Central Banks: Other central banks, including the Bank of England, ECB, and Bank of Japan, are signaling dovish moves, while the dollar looks likely to consolidate gains through October.
• GBP Repricing: After BoE Governor Bailey’s comments on more aggressive easing, GBP saw significant unwinding, though upcoming UK data may drive further adjustments in rate expectations.

GBP Market Dynamics: Bank of England (BoE) Governor Andrew Bailey’s recent comments on more aggressive easing triggered a significant unwinding of GBP net longs, which had reached 37% of open interest as of October 1, according to CFTC data. On Friday, BoE Chief Economist Huw Pill provided some relief for sterling by cautioning against cutting rates too aggressively, but markets are now closely watching for any softening in data that could justify more dovish repricing. Currently, markets are pricing in 22bp of cuts for November and 17bp for December, leaving room for more dovish adjustments.

With a relatively quiet UK data week ahead—focused on August GDP and industrial production—most of the market’s attention will be on next week’s key releases, including jobs data and the CPI report. EUR/GBP has retraced half of its post-Bailey gains, and we expect the pair to stabilize or move back toward 0.830 before the upcoming UK data. The GBP/USD has moved closer to our near-term target of 1.300, and while modest support may emerge for the pair, upside risks for the dollar remain. We maintain our target amid the expectation that markets may increasingly price in BoE cuts following Bailey’s comments.

EUR/USD Outlook: We anticipated the EUR/USD dropping below 1.10 as a matter of “when,” not “if,” due to the growing gap in short-term rates between the USD and EUR. While the 1.100 level could have acted as a stronger support, robust US job numbers weakened it. Some mild support may emerge in the coming days, now that both the Federal Reserve and European Central Bank (ECB) have completed their repricing. However, we believe the risks still lean to the downside by the end of October, as we expect the ECB to cut rates. The EUR yield curve seems set to favor dovish bets, and other factors, like a stronger dollar, could also weigh on the euro.

This week’s relatively quiet eurozone data calendar shifts focus to ECB speakers. Last week, hawkish ECB member Isabel Schnabel hinted at concerns about growth, possibly opening the door for an October rate cut. We’ll be watching for commentary from figures like Joachim Nagel and ECB Chief Economist Philip Lane. Over the weekend, dovish member Francois Villeroy indicated an October cut is likely. Markets are now aligned with this, pricing in 23bp of easing next week and another 25bp in December. With the next ECB meeting on October 17, we don’t expect significant shifts in rate expectations unless there’s a major surprise in US data. Currently, the USD two-year swap rate gap stands at 125bp, and this rate differential points toward further exploration below 1.09 in EUR/USD.

GBP/USD Outlook: Friday’s blowout US jobs report sparked the kind of hawkish rate repricing we thought would take weeks to unfold. Markets are now in sync with Federal Reserve Chair Jerome Powell’s pushback against larger cuts, aligning with projections for 25bp rate cuts in November and December. There likely won’t be any new catalyst for dovish market shifts until late October when fresh jobs and activity data arrive. This week’s inflation data (CPI and PPI) isn’t expected to significantly impact the dollar, as attention remains focused on the employment side of the Fed’s mandate. Economists expect core CPI for September to slow to 0.2% month-on-month, but even a surprise won’t drastically alter Fed pricing.

The FX market has undergone a hard reset, with hopes for a dovish Fed evaporating. At the same time, other major central banks like the ECB, Bank of England, and Bank of Japan have been signaling dovish moves, limiting the upside for currencies against the USD. In the near term, markets seem to have abandoned hopes for a 50bp cut, and the Middle East situation, while not escalating further, is keeping oil prices elevated. With the US presidential election just weeks away, markets may favor defensive, USD-positive positioning ahead of the contest. All told, the dollar appears more likely to hold its recent gains rather than revert to mid-September levels. We expect the DXY to hover around 103.0 by the end of October. In other G10 currencies, we expect a 50bp rate cut from the Reserve Bank of New Zealand, putting pressure on the NZD. Meanwhile, Norway, Sweden, and Canada’s upcoming inflation and jobs reports should provide insight into whether additional cuts are likely.