EUROPEAN FX UPDATE: USD losses extend into a second session, EUR remains underpinned by French optimism

USD: DXY -0.3%; 98.79

• After starting the week on the front foot, DXY was knocked lower yesterday by a combination of a pick-up in the EUR, US-China trade tensions and dovish comments from Fed Chair Powell. On the latter, the key takeaway was the ongoing acknowledgement of the softness in the labour market by the Fed Chair. Something which could be aggravated by the ongoing US shutdown and expectations of mass federal layoffs. Accordingly, markets continue to near-enough fully price in 2 x 25bps cuts by year-end. In the absence of tier 1 official US data, traders need to look elsewhere for a steer on the economy. One potential source will be today's Fed Beige Book, which will provide anecdotal evidence on the performance of the US economy. ING argues that the Beige Book played a key role in the Fed’s 50bp cut in September 2024. Elsewhere, NY Fed Manufacturing and Cleveland CPI are due on deck with the latter coming ahead of next week's delayed BLS release. Today's speaker slate includes Fed's Miran, Bostic, Waller & Schmid. DXY has delved as low as 98.73 with the next target coming via the 9th October trough @ 98.69.

EUR: EUR/USD +0.3%; 1.1635

• EUR remains buoyed following yesterday's French-induced bounce, which saw EUR/USD reclaim 1.16 to the upside. Markets took solace in the announcement by PM Lecornu to suspend pension reform. Whilst this itself is not seen as economically prudent, the move has been met with a positive response from the Socialists, who will not support any motion to censure the government. Accordingly, betting markets now only see a 35% chance of fresh elections by year-end vs. circa 57% at this time yesterday. That being said, the budget will likely still be subject to amendment in the debate process and Lecornu will need support from the Right. Furthermore, there are reasons to be sceptical whether the final version of the budget will be able to get the nation's deficit/GDP ratio back onto a sustainable footing. Elsewhere, the slew of ECB speak over the past 24 hours has failed to shift the dial for market pricing and that will likely remain the case with Villeroy, de Guindos, Lane & Lagarde due to give remarks. EUR/USD has ventured as high as 1.1644 with the next target coming via the 9th October peak @ 1.1648.

JPY: USD/JPY -0.4%; 151.18

• The Yen's gains vs. the USD have extended into a second session with the former underpinned by a broad haven appeal alongside US-China trade tensions. That being said, the domestic story remains a tricky one with political tensions front and centre. Following the recent collapse of the ruling coalition, opposition parties are scrambling to see if they can present a credible candidate as an alternative to Takaichi. Accordingly, Japan's Parliamentary Committee failed to agree on holding an election to choose the next PM on October 21st, as proposed by the LDP. Comments from the DPFP leader suggested that there is still some distance with the CDP in talks, but if issues can be resolved, there could be another meeting on October 20th. All of this has added to the uncertainty in Japan and has suppressed expectations of BoJ tightening this month with just 5bps of hikes priced for the October meeting and a circa 40% chance of a move by year-end. USD/JPY briefly made its way onto a 150 handle, delving as low as 150.91 before reclaiming 151 status.

GBP: GBP/USD +0.2%; 1.1646

• After a brief wobble vs. the USD yesterday in the wake of a dovish labour market report, the pound has since stabilised and briefly hit a new high for the week @ 1.3373. Yesterday's jobs report was followed up by remarks from BoE Governor Bailey who noted that the data supports his view of a softening labour market. Additionally, Taylor also stated that he now sees a "bumpy" landing as more likely than a soft landing. We look to remarks from MPC member Breeden to see if more of a consensus on the board is building towards loosening policy in the near-term. That being said, markets remain mindful of the September inflation report due on October 22, which is expected to see inflation hit circa 4%. Additionally, the November 26th budget is a great source of uncertainty for the MPC. On which, in an interview today, UK Chancellor Reeves says she is looking at both tax rises and spending for next month. The next upside target for Cable comes via the 1.34 mark.

Antipodeans: AUD/USD +0.5%; 0.6517. NZD/USD +0.2%; 0.5724

• Both are on the front foot vs. the USD, albeit the AUD is slightly outperforming its antipodean peer following a strong Yuan fix by the PBoC and hawkish comments from RBA Assistant Governor Hunter who said recent data has been a little stronger than expected and inflation is likely to be stronger than forecast in Q3. She also noted that the labour market and economic conditions might be tighter than assumed. Note, RBA Governor Bullock and Assistant Governor Kent are due to give remarks later. The September jobs report is due overnight, which is expected to see employment growth pick up to 20k from 5k. That being said, expectations for RBA pricing will pay greater attention to the Q3 inflation report due at the end of the month. As it stands, markets assign a 44% chance of a cut next month. AUD/USD is back on a 0.65 handle and eyeing Monday's 0.6532 peak. Such a test will likely need US-China tensions not to escalate from here. NZD/USD has gained a firmer footing on a 0.57 handle, venturing as high as 0.6523.

15 Oct 2025 - 10:00- ForexEU Research- Source: Newsquawk