Mildly bullish. Despite recent weakness from the Fed’s hawkish shift, the Euro retains medium-term support from sticky Eurozone inflation, a patient ECB stance, and narrowing long-term yield gaps as US easing eventually resumes. Near term, steady Eurozone data and neutral ECB rhetoric could help the Euro stabilize, while risk-off sentiment or softer US data may lift it further. The broader setup favors gradual Euro recovery once US rate expectations peak. Overall, the pair may base near 1.15 and rebound toward 1.17 as policy divergence narrows and global risk sentiment stabilizes.

EUR: Bullish

The Euro ended the week weaker, mainly due to the sharp rebound in the US Dollar after the Federal Reserve’s hawkish shift. EUR/USD began the week stable around 1.1650, supported by a generally positive market mood. The tone changed midweek after the Fed’s comments triggered a dollar rally that overwhelmed the Euro. While the European Central Bank meeting delivered no surprises, the widening interest rate gap between the US and Europe drove the Euro lower. The pair fell from a weekly high near 1.1667 to a low of 1.1523 by Friday, closing near its weakest level despite persistent inflation pressures in the Eurozone.

The ECB kept rates unchanged at its October meeting, as expected. The statement repeated its data-dependent approach without signaling any new policy direction. In her press conference, President Lagarde said the inflation outlook was “broadly unchanged” and mentioned that some downside growth risks had eased, but overall the tone remained neutral. Market reaction was muted, and expectations for a December rate cut remained minimal. ECB officials reinforced a cautious stance throughout the week. Panetta warned about redirected Chinese production affecting Europe, while Rehn, Muller, Kazaks, and Villeroy emphasized a patient approach until the December projections. A Reuters report also suggested policymakers were preparing for a “December showdown” on inflation and the longer-term forecast for 2028, showing divisions within the council.

German data was mixed. The Ifo survey showed improvement in business sentiment but weaker current conditions. GDP data confirmed stagnation in Q3 with 0.0% growth, avoiding a technical recession by a narrow margin. Inflation in Germany came in slightly hotter than expected. Across the Eurozone, October’s flash HICP showed headline inflation at 2.1%, while core inflation held steady at 2.4% instead of cooling. This indicated ongoing price pressures but failed to lift the Euro. France’s GDP grew by 0.5% in Q3, and Spain’s CPI was higher than forecast. The Eurozone unemployment rate remained at 6.3%.

On the geopolitical front, the EU worked to manage its relationship with China, with talks scheduled on rare earths and reports of discussions about imposing an “in-kind” tariff to protect access to critical minerals. In France, political tensions rose as the government faced internal debate over a proposed wealth tax, with the Socialist party threatening to bring down the government over the issue.

The Euro declined this week as the Dollar’s post Fed rally dominated FX trading. Early support from firmer Eurozone inflation and a slightly better German Ifo survey faded after Powell’s hawkish tone reset expectations for further easing. The ECB meeting repeated that policy is “sufficiently restrictive,” offering no new signal, while widening US–Euro rate spreads and stronger US yields drove the Euro lower into Friday, closing near 1.1520.

Near term, mixed. The Euro’s short term path is finely balanced. On one hand, the Fed’s hawkish shift and higher US yields keep external pressure on the currency. On the other, sticky Eurozone inflation and the ECB’s reluctance to discuss cuts before December provide a partial cushion. Domestic data suggest stabilization rather than acceleration, and the market is now looking for confirmation from key risk events, like Monday’s Manufacturing PMI, Tuesday’s Lagarde speech, Wednesday’s Services PMI, and Thursday’s Retail Sales. If those releases confirm steady activity and Lagarde maintains a patient tone, the Euro may hold its ground. Weak PMIs or dovish messaging would tilt it lower.

The Euro’s near term behavior will also depend on global risk sentiment. In a risk on environment, investors tend to favor higher beta currencies such as the AUD and NZD, often using the Euro as a counter currency, which could see the Euro underperform against them. Conversely, if risk appetite fades and sentiment turns defensive, the Euro is likely to strengthen relative to these pro-cyclical peers as capital shifts back toward lower beta assets and core European markets.

Longer term, weak bullish. The broader setup remains mildly constructive. The ECB’s patient stance and a healthier external balance underpin gradual improvement, while fiscal concerns in France and Italy remain contained. As the Fed eventually moves toward easing and the policy gap narrows, relative yield support should favor the Euro over time. The path will remain uneven and sensitive to shifts in global risk tone and front-end yield spreads.

If the narrative changes materially, for example, if the ECB signals earlier easing or sovereign spreads widen sharply while the Fed holds firm we will reconsider and lean toward a weaker Euro until the data and market pricing improve.

USD: Short at rally

The US Dollar ended the week much stronger after a sharp hawkish shift from the Federal Reserve, which completely overshadowed positive developments in US-China trade relations. The DXY started the week trading in a narrow range below 99.00 as markets expected a 25bps rate cut and looked forward to the Trump-Xi meeting. The situation changed midweek when the Fed delivered the expected rate cut but Chair Powell’s press conference turned out far more hawkish than anticipated. He pushed back against the idea of another cut in December, leading traders to reprice expectations aggressively. The DXY jumped from a low of 98.62 before the announcement to a high of 99.84 by Friday, marking a volatile week dominated by a quick swing from anticipated easing to renewed confidence in tighter US monetary policy.

The Federal Reserve cut rates by 25bps to a range of 3.75–4.00% as expected, but the vote was divided. Governor Miran favored a larger 50bps cut, while Kansas City Fed President Schmid wanted to hold rates steady. The Fed also announced the end of its balance sheet contraction starting December 1st. During his press conference, Powell stated that a December cut was “far from assured” and highlighted differing opinions within the committee. He called the move a “risk management” step but hinted at a possible pause ahead, suggesting growing sentiment within the Fed to wait before acting again. This triggered a major shift in market pricing, with the probability of a December cut dropping from over 90% to around 65%. Later in the week, several Fed officials reinforced the hawkish stance. Schmid justified his dissent by pointing to continued economic strength and inflation pressures, while Fed members Logan and Hammack said they preferred to hold rates, further supporting the less-dovish outlook.

In global developments, the Trump-Xi summit eased trade tensions. The two leaders agreed to a one-year truce involving a US reduction of fentanyl-related tariffs and China’s pause on new rare earth export curbs, along with an agreement for China to purchase US soybeans. Elsewhere, the ceasefire in Gaza ended as Israel launched strikes in response to Hamas violations, and reports that the US planned attacks on Venezuelan military sites briefly created risk-off sentiment, though these reports were later denied.

Due to the ongoing US government shutdown, major data releases such as Non-Farm Payrolls were unavailable, putting the focus on smaller indicators and Fed commentary. The ADP estimate showed a job gain of 14,250 for the four weeks ending October 11th, indicating a labor market still strong enough to maintain employment levels. Consumer Confidence rose to 94.6, the Chicago PMI exceeded expectations, and Pending Home Sales were flat, missing forecasts of a 1.0% increase.

Market sentiment at the start of the week centered on optimism over trade talks, which supported risk-sensitive currencies and limited the dollar’s upside. However, sentiment shifted abruptly after the Fed meeting. Powell’s hawkish tone led to a dollar-driven rally supported by higher yields and widening rate differentials. The move reflected renewed confidence in the US economy and tighter policy expectations, even as the strong dollar weighed on equities toward the end of the week.

Near term, weak bullish. The near term driver is clearly domestic policy repricing. The Fed delivered a 25 basis point cut to 3.75 to 4.00 percent but Powell framed it as insurance and explicitly said a December cut is far from assured. That took the Dollar from a soft carry story back to a higher for longer story. Front end US yields moved up and the implied path of Fed easing for the rest of the year was priced out, which widened rate differentials against most peers and offered the Dollar broad support even as broader risk sentiment stayed constructive after the Trump Xi trade truce. Externally, improved trade tone and some easing in global tariff tension would normally encourage high beta currencies at the Dollar’s expense, but this time the hawkish shift from the Fed dominated and kept capital rotating toward US assets. Into next week, if ISM and labor data show that activity is still holding up and wages are not collapsing, the market is likely to keep treating the Fed as on pause and keep the Dollar bid. A meaningful dovish surprise from Powell or a sudden drop in US labor indicators that revives December cut bets would weaken this stance and take the bias down toward neutral. A renewed geopolitical shock that sparks full risk aversion could also add to Dollar strength given its reserve and safe haven role, but that is secondary to the rates story right now.

Longer term, weak bearish. The bigger picture has not fully changed. The Fed is still closer to an easing cycle than several peers and the committee is already split, with one voter wanting a larger 50 basis point cut and another wanting no cut at all. That tells you policy is already in late cycle risk management mode. US growth is still outperforming for now, but the fiscal mix, the shutdown overhang, and signs of softer housing and business investment point to slower momentum into year end. As the global backdrop stabilizes around a US China tariff truce and as other central banks eventually catch up to the Fed’s earlier tightening, relative rate support for the Dollar should erode. The Dollar also tends to underperform once the market believes that the peak in US real yields is in and that the policy path is gradually lower. That remains our medium horizon baseline. The path lower is unlikely to be linear though because the Dollar still benefits from safe haven flows whenever global credit or geopolitical stress flares.

If the narrative that drove the Dollar this week breaks down, the view can flip quickly. If incoming data or communication forces Powell to walk back the hawkish tone and guide clearly toward another cut in December, or if front end yields fall as markets rebuild aggressive easing expectations, then the Dollar would likely lose its current policy premium and slip back toward a weak bearish near term profile despite any ongoing trade calm. A sharp improvement in global risk appetite with stronger PMIs abroad, narrowing US rate differentials, and renewed demand for higher beta commodity and China linked currencies would have the same effect. In that scenario we would reconsider and lean toward a weaker Dollar until the data and market pricing improve.

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