The surge in oil prices and strong AI spending increase the cost for businesses and keep inflation high. The persistent inflation keeps the door open for further increases in the interest rate. The market now watches for the next employment and inflation data to further understand the next move in the US Treasury yields. In my view, the next move in the US dollar will depend on the change in the expectations for interest rates. This article presents the outlook for interest rates and the key levels to understand the next move in US dollar, EURUSD and GBPUSD.
US Interest Rate Forecast: December Hike Risks Remain in Focus
The market expects the Fed to keep interest rates at 3.75%-4% in October but expectations of rate hike in December are high due to persistent inflation and high oil prices.
The energy market disruptions in the Middle East have impacted the US Treasury market. US Treasury yields have continued to rally higher, but the momentum is slowing in October. However, the recent trend suggests that the 10-year US Treasury yields may continue to go up towards the 6% level or beyond. The weakness in employment, slow growth and the drop in inflation may limit the current strength in US Treasury yields.
The chart below shows that the 10-year US Treasury yield dropped from 5.37% towards the key support level of the 50-day SMA near the 5% area. The yield is now consolidating around this support and looks to rally higher again.
The MOVE index is high but not that extremely high. The chart below shows that the MOVE Index currently remains below the warning level of 120. A break above the 120 level would increase the risk of surge to the 150 area. This may bring additional volatility in the Treasury market.
The Fed started to purchase short term Treasury securities in December 2025 when the liquidity issues arrived. These operations help the Fed to control interest rates in the short term and support the functionality of the market.
Inflation currently remains above the Fed’s 2% target. The Fed is trying to keep repo markets and Treasury markets liquid enough to function via ample reserves.
EUR/USD Price Forecast
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See all EUR/USD forecastsAI Spending Raises Inflation Risks as Factory Construction Slows
The construction boom in data centers and power infrastructure has been so significant that it might be crowding out some other sectors. It does not mean that the other sectors are not receiving capital, but it means that the strong demand for electricity, workers and construction materials may increase the cost for other businesses and increase the pressure on inflation.
This weakness can be seen in the construction of manufacturing facilities. The construction of manufacturing dropped significantly from the peak of $250,233 million in 2024 to $170,339 million in 2026. This highlights weakness in other parts of business investment.
US Dollar Forecast: 100.50 Support Shapes the Next Move
Support at 100.50 Keep Path Open to 104
The outlook for US Dollar Index will depend on how expectations for the Fed change compared with expectations for other central banks. If the market expects more restrictive outlook for US rate relative to Europe and the UK, the US dollar may strengthen against these currencies. This may increase pressure on EUR/USD and GBP/USD. But strong expectations for interest rates in Europe and UK will provide support for the euro and the pound.
The chart below shows that the US Dollar Index has been trading within the ascending channel and has continued to drop since September 2022. The index has formed strong support at the lower boundary of the channel near the 96 level and has been consolidating above this support zone since June 2025.
But the index broke above 100.50 in September and triggered a strong rally in October to reach a high at 102.945. This suggests a positive outlook. This rally was triggered by expectations of high interest rates in the coming months.
From technical perspective, the US dollar has remained uncertain since the lows of June 2025 and looks to find the next move. If the index drops back below 100.50, it will increase the possibility of another drop towards the support of ascending channel near 96.50.
As long as the 96 level holds in the US Dollar Index, the index may continue to consolidate near 104. However, if the index consolidates below 102 and breaks 96, it will increase the possibility of quick drop to 90.
A Break Above 102.80 Could Push Dollar to 106-107
The weekly chart for the US dollar index also shows that the recent drop in the index came from the 200-week SMA near 102. The index has already produced bearish weekly candle in October. Now it is consolidating in the near term to find the next move.
If the US dollar index continues to drop below 101.50, it will likely increase the possibility of a drop towards the 100.50 level. But a recovery above the 102.80 level will open the way for strong rally towards the descending trend line at the 106 to 107 level. This descending trend line stretches from the October 2022 highs.
EUR/USD Forecast: The Key Support at 1.11 Trigger Rebound
The chart below shows that the Federal Reserve increased interest rates to 4% in September 2026 while the ECB also increased the refinancing rate to 2.65%. This maintains the gap between the interest rates of these two banks. However, the higher interest rates at the Federal Reserve suggest strength in the US dollar, which has pushed EUR/USD to the downside.
The strong rally in the US dollar index in September has pushed EUR/USD towards the key support zone as seen in the chart below. The pair has already reached the $1.11 support as discussed in the previous analysis. The pair rebounded back towards the 1.1240 level.
If the pair continues to move above 1.1265, it will open the way for a rally to the 1.1360 level. For EUR/USD, the pair must break above the 1.16 level at the descending trend line to open the way for further upside towards the 1.19 level.
The strong support in EUR/USD is also observed on the daily chart which shows that the recent support near 1.11 was formed at the descending channel pattern. If EUR/USD holds 1.1130, it would likely rally towards the 50-day SMA near 1.1430. The pair will continue to consolidate in negative trend if it remains below the 200-day SMA at 1.1573.
GBP/USD Forecast: A Break Above 1.3430 Could Open the Path to 1.3650
The chart below shows that the Federal Reserve increased the interest rate to 4% in September, while the United Kingdom holds the interest rate at 3.75%. This increases the gap between the interest rates of these two banks by 0.25%. This further provides an advantage for US dollar against the pound.
However, GBP/USD has been trading within tight range of 1.30 to 1.3780 during the past year. This range has been narrowed to 1.3190 to 1.3650 since February 2026.
Now, the pair has formed strong support at 1.3190 in October 2026 and triggered a strong rally towards the 50-day SMA. A break above 1.3430 will likely continue the pair to the upside to 1.3650.
However, if the pair fails to hold the 1.33 level, it will trigger another drop towards 1.3190. Overall, the pair does not show any clear direction as the 50-day and 200-day moving averages are flat.
What to Watch Next
Oil prices broke the key levels last week and continued to surge, while AI spending remains strong. This can keep the cost of business high and strengthen the case for rate hike in December.
The weak employment data and slow growth could limit further gains in Treasury yields. I think that the next inflation and jobs data will help to understand whether the Fed needs to raise rates again. The correction in oil prices will likely ease that pressure.
The next move in US dollar will likely depend on how expectations for the Fed compare with expectations for the ECB and the Bank of England. A break above 102.80 in the US dollar index could strengthen the recovery, but a break below 100.50 would weaken the outlook for the US dollar.
A break above 102.80 in US dollar index may keep the EUR/USD under pressure in the short term. But a break above 1.1265 in the EUR/USD may extend the pair to 1.1360. On the other hand, a break above 1.3430 in GBP/USD may open the way for a rally to 1.3650.
Read more: December Hike in Focus Ahead of Japan CPI