Dollar Index: Fed Pause Bets Rise, but Policy Still Favors the Dollar
While expectations for an immediate Federal Reserve hike are fading, the dollar remains well bid. Fed Governor Christopher Waller said more interest rate hikes will likely be necessary to bring the inflation back down to the 2% target. He also noted, however, that interest rate hikes do not need to be consecutive. Currently, markets are pricing in a 17-20% chance of a rate hike in October, and the majority of the action is priced in for December.
Cooling labor markets continue without widespread layoffs. Initial jobless claims came in at 197,000 for the week ending October 3, down from 199,000 the week prior, further supporting the Federal Reserve’s ability to stay focused on bringing inflation down despite a disappointing September payroll report.
EUR: French Fiscal Risk Overshadows ECB Tightening Expectations
Rising French deficits (Credit Default Swaps trading at around 87 bp) are seen as increasing perceived sovereign credit risk and raises risks over the euro area if unaddressed. Euro area real GDP growth is estimated at around 0.4% for Q3, despite the energy crisis and current recession risks.
There are limits to how much the euro can appreciate with France’s debt and budget outlook. French 10-year yields rose nearly 80 basis points since early September. The French government expects the 2026 deficit to exceed 5% of GDP. As a result, it forecasts a record 2027 issuance of €340 billion. The euro-area finance ministers and ECB want France to quickly implement its 2027 budget to improve confidence in the French bond market.
Some counterweight exists with monetary policy. Euro-area inflation rose to 3.8% in September. A Reuters poll, conducted from October 5 to 8, showed that nearly 90% of economists expect the ECB to raise the 2.5% deposit rate by 25 basis points in December.
GBP: BoE Tightening Bets Meet a Fiscal Credibility Test
Sterling continues to appreciate with BoE policy expectations. Market participants expect over an 80% chance of a November rate hike and two further rate hikes by February.
EUR/USD Price Forecast
Every new EUR/USD analysis as it publishes, today's technical signal and key levels, live price — on one page.
See all EUR/USD forecastsMegan Greene, BoE policymaker, said that forecasts for 3.5% wage increases next year could likely compound the challenge of returning inflation to 2%. However, Governor Bailey commented that the UK needs a fiscal policy framework that is credible to maintain control of government borrowing costs and ease concerns ahead of the October 28 Budget.
U.S. Dollar Index Technical Analysis: DXY Slips Below 102.10 as 101.76 Support Comes Back Into Focus
The U.S. Dollar Index has pulled back from the 102.49 resistance area on the 2 hour time frame and has established support near the 102.02 area. DXY has broken below a steeper rising trendline and is currently testing the short term moving average zone. From a longer term perspective, DXY remains in an uptrend as it is above the longer term rising trendline and the 101.76 support area, however, price action has slowed down.
101.76 remains the first support area and a clear break below it would bring 101.49 and 101.16 into play. The 102.49 level remains the first resistance area. If price action continues higher, 102.70 and 102.95 would come into play.
Momentum has slowed meaningfully as the RSI has recently been in the lower half of its range. This has created a neutral-to-slightly-bullish outlook on DXY as long as it is above 101.76. A clear break below 101.49 would shift the longer term outlook to bearish and a break above 102.49 would shift the outlook back to the bullish side.
GBP/USD Technical Analysis: Sterling Holds Above 1.3222 as 1.3284 Remains the Key Breakout Level
On the 2-hour chart, GBP/USD is trading near 1.3243, having bounced from 1.3180. As of now, the pair is trading above the 100 and 200 SMAs in the 1.3222 area, but is caught by the major descending trendline. As a result, I view the current situation as an improving short-term situation, but not a full trend reversal.
1.3284 represents first resistance and a break above that would target 1.3323. Looking at the downside, 1.3222 is the first support, followed by 1.3180, 1.3147, and 1.3113.
RSI is currently above the 50-line and rising which suggests that the pair may be in a short-term bullish condition. I view the condition as neutral to slightly bullish as long as price is above 1.3222. A clean break above 1.3284 would target 1.3323 and a break below 1.3180 would indicate that the pair may be headed lower.
EUR/USD Technical Analysis: Euro Breaks the Trendline as 1.1272 Becomes the Next Recovery Test
EUR/USD is at 1.1232 on the 2 hour chart having broken above the descending trendline and reclaimed the 1.1212 resistance level. What is interesting is price has formed one of the more clear short term bullish set ups in the past couple of days, but the overall trend and higher time frame structure is still in favor of the bears and unchanged.
The initial resistance sits at 1.1272. A 2-hour close above that would bring 1.1334 into play. If price breaks down and takes out 1.1212, then look for additional support at 1.1161, 1.1115, and 1.1063.
RSI also recently broke above 50 and is now in the bullish zone, confirming the near term uptrend. While above 1.1212 and the trendline, I am neutral with a slight bullish bias. A convincing move above 1.1272 would add to the bullish bias, while a move below 1.1161 would give back the bullish edge.
