EUR/USD and GBP/USD Rise as Fed Rate Hike Expectations Shift

The euro and British pound retained upside potential against the US dollar following a sharp drop in US Treasury yields and dousing of near-term rate hike expectations. Comments from Federal Reserve official Kevin Warsh signaled caution on monetary policy, effectively unwinding market odds of an October rate increase. Market expectations have now shifted toward a December policy adjustment, with futures pricing in roughly an 80% probability of a rate hike to the 4.00–4.25% range.

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The US dollar failed to sustain gains despite stronger-than-expected economic data. September US Producer Price Index (PPI) figures came in at 1.3% month-on-month and 6.3% year-on-year, exceeding forecasts. Core PPI rose 0.7% MoM to 5.0% YoY, while retail sales increased 0.8% MoM against a 0.3% consensus estimate. However, declining bond yields outweighed the solid inflation and retail metrics, limiting dollar upside and allowing European currencies to hold near multi-day highs.

Eurozone Inflation and Economic Data Outlook

Market attention now turns to the final Eurozone CPI reading for September, expected to confirm the flash estimate of 3.8% year-on-year. Eurozone inflation has accelerated steadily in recent months from 2.8% in June, driven primarily by energy costs. The European Central Bank (ECB), which currently maintains its deposit rate at 2.50%, is anticipated to pause at its October meeting before implementing a final rate increase to 2.75% in December. An upward revision in today's inflation data would further reinforce ECB tightening expectations.

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Additional releases today include the Eurozone trade balance, Italian CPI, and US industrial production data for September, forecasted at +0.4% MoM following a flat reading in August. Solid US industrial output could offer temporary support to the dollar later in the session.

EUR/USD Technical Levels

For EUR/USD, the critical resistance level remains at 1.1241. A sustained break and daily close above 1.1241 would open the path toward resistance at 1.1275, with secondary upside targets near 1.1310. Conversely, if resistance at 1.1241 holds, bears could re-enter the market. On the downside, primary support rests at 1.1193 and 1.1156, with further demand expected near 1.1117.

GBP/USD Technical Levels

GBP/USD continues to trade near weekly highs, with immediate resistance located at 1.3307. A clear breakout above 1.3307 targets further gains toward 1.3341 and 1.3368. On the downside, a failure to hold above resistance could prompt a corrective pull back toward 1.3273. A breakdown below this level exposes deeper support levels at 1.3233, 1.3209, and 1.3183.

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