The euro and the pound have recovered well against the dollar and have erased Friday's tumble that followed strong U.S. labor data. Recall that unemployment fell to 4.1% in October and nonfarm payrolls rose by 165,000 versus 65,000 expected, which initially strengthened the dollar. On Monday the picture was reversed. Positive Sentix investor confidence data for the eurozone, the absence of active dollar buying, and a strong recovery in U.S. equity markets combined to weaken the dollar via the bond market. The result was a sizeable rally that now calls further declines in the pairs into question.
What Sentix shows: the November index printed 2.4 versus a 1.8 forecast and 2.7 in October—better than expected but below the prior reading, meaning the deterioration in sentiment is slowing. Notably, the euro gained despite weak domestic data. Germany's trade surplus fell to €15.6bn in September versus a forecast of €18.1bn and €17.8bn (revised) a month earlier—the third decline in a row from €21.3bn in July—and eurozone retail sales plunged 0.7% month-on-month in Friday's data versus -0.1% expected. Why did not the euro fall? I believe the market focused on the dollar rather than on European fundamentals; euro buyers won the day, while those betting on continued dollar strength lost out.
On Fed rhetoric, Chicago Fed president Austan Goolsbee said yesterday that data suggest some data center investment looks overheated and central banks typically respond aggressively to such demand. He argued for maintaining restrictive policy with an emphasis on fighting inflation, a noticeably firmer stance than in October, when he left open both hikes and a pause. That did not help the dollar against the euro and the pound. Richmond Fed president Thomas Barkin also said policy would remain tight, calling inflation stubbornly high and noting companies increasingly pass cost increases to consumers. He expects rate rises but gave no specific ceiling; on November 5 he backed a gradual pace of hikes without naming a peak.
The market now prices the chance of a December hike at more than 80%, up from 67–75% on November 2, and many experts expect the Fed to continue raising rates into next year, possibly until March 2027. The policy rate is currently 3.75–4.00% after a 10–2 vote on October 28; the next meeting is December 9. The ECB deposit rate sits at 2.50%, with a move to 2.75% expected on December 17, leaving the rate gap in the dollar's favor. The Bank of England, having raised to 4.00% with a 9-0-0 vote, also retains a hawkish tone. Central banks are broadly aligned to tightening, so dollar support should primarily come from data—chiefly inflation readings.
Looking at today's calendar, there is no major eurozone data, so attention shifts to U.S. inflation. The headline CPI for October is expected to be +0.3% month-on-month after +0.6% in September. Recall the run: June falling, July +0.1%, August +0.4%, September +0.6%, and now forecast +0.3% for October. Last year's October data are unavailable due to the government shutdown at that time, so a year-on-year headline figure will not be published; September's annual rate was 3.7%. The focus will likely be on core CPI, forecasted to be +0.2% month-on-month in October after +0.3% in September, because core strips out volatile energy and better reflects persistent inflation pressures. If prints exceed forecasts, Fed officials will sound tougher, and with December already priced in, further hikes for next year would become more likely—strengthening the dollar.
After the release, many Fed speakers will comment, including Lorie Logan, Jeffrey Schmid, and Michelle Bowman; from the Bank of England, we will hear Briden, Lombardelli, and Pill. A strong labor market and high inflation increase the odds of further Fed tightening. I lean toward dollar downside pressure persisting before the inflation prints, giving the euro and the pound room to recover further, but a core CPI beat could quickly bring dollar buyers back.
Technical picture for EUR/USD (hourly)
For buyers I see support at 1.1218: a false break below this level is a long entry toward 1.1244. A break and hold above that range opens the path to 1.1272, with a further target at 1.1298, where I will look to sell bounces for 20–25 pips. Shorts from 1.1244 and 1.1272 are valid on false breaks; their bear target is 1.1218. If bulls do not defend 1.1218, a break and hold below the range would prompt a slide to 1.1187. There I would consider long on a false break, with a farther target at 1.1164 and buying bounces for 20–25 pips.
Technical picture for GBP/USD
The story is much the same. Given Andrew Bailey's firm tone yesterday, the pound may have upside potential. First resistance is 1.3460, where I expect bears on a false break. If selling pressure returns in the European session, active buyers should appear around 1.3431, where I would buy false breaks aiming for a move above 1.3460. A break above 1.3460 could run to 1.3481, where I will look to short failed closes, and the next target is 1.3501—there I will sell bounces for 15–20 pips. If bulls do not appear at 1.3431, wait for a correction to 1.3399 (near the moving average) for longs on failed closes, or buy bounces from 1.3371 targeting 25–30 pips.