Euro Steadies Against Dollar Amid Easing US Treasury Yields & Cautious ECB Rate Remarks

The euro steadied against the US dollar overnight, with EUR/USD trading near 1.1226 after falling to a 17-month low earlier in the week. The move coincided with a decline in US Treasury yields and some stabilisation in French government bonds. However, concerns about France's fiscal outlook remained a potential source of uncertainty for the single currency.

US Treasury yields eased on Thursday after a $22 billion auction of 30-year Treasury bonds drew solid demand. The auction cleared at 5.618%, with a bid-to-cover ratio of 2.54, while the benchmark 10-year yield slipped towards 5.23%. A sustained decline in US yields could reduce some support for the dollar, while renewed inflation concerns could reverse that move.

Accounts from the European Central Bank’s (ECB) September meeting, together with recent comments from policymakers, suggested limited urgency for an immediate further increase in interest rates. Officials acknowledged risks associated with higher energy costs but noted limited evidence of broader wage-related inflationary pressures. Market expectations continued to favour an October rate hold, although a subsequent increase remained possible.

In the UK, Bank of England (BoE) Governor Andrew Bailey stressed the importance of credible fiscal policy amid elevated borrowing costs. Federal Reserve (Fed) Governor Christopher Waller said further tightening may be necessary, while allowing flexibility over timing. Friday’s US consumer sentiment and inflation expectations releases could influence near-term Fed rate expectations.

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GBP: Sterling Balances BoE Rate Expectations With Fiscal Concerns

GBP/USD: 1.3234 | EUR/GBP: 0.8481

Sterling recovered modestly against the US dollar overnight, with GBP/USD trading around 1.3234 after falling towards 1.3185 during Thursday’s session. The recovery coincided with easing US Treasury yields and comments from Fed policymaker Christopher Waller that left room for an October rate pause. However, concerns around the UK's fiscal outlook remained relevant, particularly after the 10-year gilt yield reached approximately 5.53%, its highest level since 2007.

BoE Governor Andrew Bailey stressed the importance of credible government fiscal commitments, warning that higher borrowing costs and financial-market volatility could increase pressure on public finances. Bailey also noted that the wider inflationary effects of higher energy prices remained relatively subdued, although prolonged energy-price pressures could change that assessment. Meanwhile, BoE policymakers Megan Greene and Huw Pill maintained concerns about persistent inflation, highlighting differences over how much additional tightening may be needed.

Interest-rate markets continued to price more than an 80% probability of a BoE rate increase in November, which could provide some support for sterling if those expectations remain elevated. However, weaker economic activity or further fiscal uncertainty could limit gains. EUR/GBP remained near 0.8481, close to its recent 16-month low, as expectations for near-term ECB tightening remained more restrained. A reduction in UK rate expectations or an improvement in euro-area sentiment could allow the pair to recover.

Key technical reference levels for GBP/USD: Resistance sits near 1.3280, followed by 1.3315, while support sits around 1.3180, followed by 1.3140.

Key technical reference levels for EUR/GBP: Resistance sits near 0.8490, followed by 0.8500, while support sits around 0.8450, followed by 0.8400.

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EUR: ECB Policy Caution Limits Euro Recovery Despite Softer US Yields

EUR/USD: 1.1228

The euro recovered modestly against the US dollar during Thursday's session and early Friday trading, coinciding with a decline in US Treasury yields and some stabilisation in French government bonds. EUR/USD moved towards 1.1228 after touching a 17-month low near 1.1161 earlier in the week. However, the recovery remained limited as concerns around France's fiscal position and uncertainty over future ECB interest-rate decisions continued to weigh on sentiment.

Accounts from the ECB's September meeting showed that policymakers remained concerned about inflation risks, particularly those linked to elevated energy prices. However, several officials noted that underlying inflation remained relatively contained, with limited evidence of higher energy costs feeding into broader wage pressures. Eurozone inflation stood at 3.8% in September, well above the ECB's 2% target, but the absence of substantial second-round effects has reduced the urgency for another immediate increase.

A survey of economists indicated that most respondents expected the ECB to maintain its deposit rate at 2.50% in October, while a large majority anticipated a 25-basis-point increase in December. Higher European government bond yields could also contribute to tighter financial conditions without an immediate change in monetary policy. If inflationary pressures broaden or remain elevated, expectations for further ECB tightening could increase, potentially lending support to the euro. Conversely, continued fiscal uncertainty or weaker economic activity could limit the currency's recovery, even if US yields decline.

Key technical reference levels for EUR/USD: Resistance sits near 1.1280, followed by 1.1300, while support sits around 1.1200, followed by 1.1160.

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USD: Dollar Eases as Treasury Yields Retreat & Fed Signals Policy Flexibility

DXY: 102.00

The US dollar eased towards 102.00 during early Friday trading alongside a decline in US Treasury yields following Thursday’s 30-year Treasury bond auction. The $22 billion auction recorded a bid-to-cover ratio of 2.54 and a yield of 5.618%. The benchmark 10-year Treasury yield subsequently declined towards 5.23%, coinciding with a moderation in the dollar's recent strength after it reached an 18-month high earlier in the week. Nevertheless, developments in inflation and interest-rate expectations remained relevant to the currency's near-term outlook.

Fed Governor Christopher Waller indicated that additional interest-rate increases might be necessary to bring inflation back towards the 2% target, while emphasising flexibility over their timing. Interest-rate markets were pricing approximately an 82% probability of rates remaining unchanged in October, while the probability of a December increase stood at around 81%. Persistent inflationary pressures could strengthen expectations for further monetary tightening and potentially support the dollar. Conversely, softer inflation or weaker economic activity could reduce those expectations and limit further gains.

Fresh labour-market data showed Initial Jobless Claims falling to 197,000 from a revised 199,000, below expectations of 200,000. Continuing claims, however, increased to approximately 1.716 million, while the initial claims figure suggested that layoffs remained relatively limited, the increase in continuing claims could indicate that some workers were taking longer to find new employment. Attention now turns to Friday’s preliminary US consumer sentiment and inflation expectations figures, which could influence near-term expectations for Fed policy.

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Other Currencies: Kiwi Faces Further Weekly Losses as Yen Stabilises

AUD/USD: 0.6975 | NZD/USD: 0.5614 | USD/JPY: 158.00 | GBP/JPY: 209.20

The New Zealand dollar recovered modestly during Friday's Asian trading session, with NZD/USD trading around 0.5614 amid lower US Treasury yields. However, the pair remained close to recent lows and faced the possibility of a seventh consecutive weekly decline, which would mark its longest losing streak in more than four years. The interest-rate differential between New Zealand and the US remained a potential factor influencing the currency, particularly with US borrowing costs elevated.

Expectations surrounding Reserve Bank of New Zealand (RBNZ) policy also remained relevant. Some economists anticipated that the RBNZ could leave interest rates unchanged in October before considering a further increase in December. Stronger expectations of additional tightening could provide some support for the New Zealand dollar. Conversely, weaker domestic economic activity or a renewed increase in US Treasury yields could limit its recovery.

USD/JPY remained close to 158.00 with expectations of further Bank of Japan (BoJ) tightening among the factors influencing sentiment towards the yen. Thursday’s regional economic assessment indicated that more businesses were passing higher raw-material and labour costs on to consumers, suggesting the possibility of broader inflationary pressures. Meanwhile, Japanese household spending declined by 3.1% year-on-year in August, compared with expectations of a 3.6% decline. Persistent inflation could increase expectations for further BoJ tightening, although subdued household spending and elevated US Treasury yields could limit potential yen gains.

AUD/USD recovered towards 0.6975 as the US dollar eased following Thursday’s Treasury auction. The move coincided with lower US yields, although reduced expectations for further Reserve Bank of Australia (RBA) tightening and uncertainty surrounding global energy prices remained potential constraints. A continued decline in US yields could create conditions for a further AUD/USD recovery, conversely, renewed demand for the US dollar or weaker global risk sentiment could reverse some of those gains.

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Current Rates Table

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Market Lookahead

Friday, Oct 09

• EUR ECOFIN Meeting
• EUR ECB Schnabel Speech
• US Michigan Consumer Sentiment (Oct, Prelim)
• US Michigan Inflation Expectations (Oct, Prelim)

Monday, Oct 12

• GBP BoE Mann Speech
• US Bank Holiday
• US Fed Hammack Speech

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