Fed Tightening Bets Rise Alongside US Yields as Sterling & Euro Weaken

US Treasury yields moved higher on Thursday alongside increased expectations for further Federal Reserve (Fed) tightening. The 10-year Treasury yield climbed above 5.15%, around its highest level since 2007, while the 30-year yield moved above 5.44%, reaching levels last seen in 2004. The Dollar Index (DXY) remained around the 101.20-101.30 area following its recent gains.

The move in yields came alongside further evidence of resilience in the US labour market. Initial Jobless Claims fell to 197,000 from a revised 198,000, below expectations of around 201,000. The reading added to the wider discussion around whether US economic conditions could allow the Fed to keep interest rates higher or tighten policy further.

Sterling and the euro both traded lower against the dollar during the session. GBP/USD moved towards the 1.32 area, close to a three-month low, while EUR/USD remained under pressure despite an improvement in German business confidence. Germany’s Ifo Business Climate Index rose to 89.9 from 88.8, above expectations of around 89.0.

---

GBP: Sterling Near Three-Month Lows Despite Firmer BoE Signals

GBP/USD: 1.3234 | EUR/GBP: 0.8608

GBP/USD is trading around 1.3234 after falling towards 1.3200 on Thursday, its lowest level since late June. Sterling has remained under pressure against the US dollar, while higher US yields and expectations for further Fed tightening have remained in focus.

Bank of England (BoE) Deputy Governors Clare Lombardelli and Sarah Breeden both indicated that higher energy prices could increase the likelihood of further tightening. Lombardelli said policy is increasingly likely to need to tighten if elevated energy prices persist without clearer evidence of weaker activity or easing inflation pressures. Interest-rate pricing subsequently implied around a 75% probability of a quarter-point BoE rate increase in November.

The policy outlook remains less clear-cut, however. BoE policymaker Swati Dhingra said the longer-term inflation impact from higher energy prices may become clearer over the winter and noted that the UK labour market is weaker than during the 2022 inflation shock. UK consumer confidence also improved, with the GfK Consumer Confidence Barometer rising to -13 from -14, compared with expectations for a fall to -16.

EUR/GBP has moved towards 0.8608, around its highest level in three months, with the euro gaining ground against sterling despite BoE commentary indicating the possibility of further tightening. The move leaves sterling trading against a backdrop of higher UK rate expectations but continued uncertainty over how far the BoE may ultimately need to tighten.

Key technical reference levels for GBP/USD: resistance sits near 1.3215, followed by 1.3273, while support sits around 1.3140, followed by 1.3038.

Key technical reference levels for EUR/GBP: resistance sits near 0.8611, followed by 0.8641, while support sits around 0.8590, followed by 0.8578.

---

EUR: Euro Near Two-Month Low Despite Improved German Confidence

EUR/USD: 1.1395

EUR/USD is trading around 1.1395, close to a two-month low, despite an improvement in German business confidence. The euro remained under pressure against the US dollar during Thursday’s session as higher US yields and expectations for further Fed tightening remained in focus.

Germany’s Ifo Business Climate Index rose to 89.9 in September from 88.8, above expectations of 89.0. The Expectations Index increased to 90.4 from 89.1, while the assessment of current conditions improved to 89.5 from 88.5, indicating a broader improvement in business sentiment.

Germany’s leading economic institutes also raised their 2026 growth forecast to 1.3% from 0.6% and their 2027 forecast to 1.1% from 0.9%. However, the institutes described the recovery as modest and forecast inflation at 2.8% in 2026 and 3.2% in 2027, keeping the balance between economic recovery and inflation relevant to the European Central Bank (ECB) outlook.

The improvement in German data has provided a firmer domestic backdrop, while the euro has remained under pressure against the US dollar. EUR/USD may remain sensitive to changes in US yields and rate expectations, with attention now turning to today’s US data for further information on the US outlook.

Key technical reference levels for EUR/USD: resistance sits near 1.1400, followed by 1.1501, while support sits around 1.1350, followed by 1.1325.

---

USD: Dollar Holds Firm as Labour Data and Fed Outlook Remain in Focus

DXY: 101.30

DXY is trading around 101.30 after reaching approximately 101.39 on Thursday, its highest level since late July. The dollar extended its recent gains, while higher US Treasury yields and increased expectations for further Fed tightening remained in focus.

US Initial Jobless Claims fell to 197,000 from a revised 198,000, below expectations of around 201,000. The reading pointed to continued stability in the US labour market, while continuing claims remained close to their lowest level in more than three years. The data may be relevant to the Fed’s assessment of labour-market conditions and elevated inflation pressures.

Fresh Fed commentary also kept the possibility of additional tightening in focus. New York Fed President John Williams said another rate increase this year remained a reasonable possibility, while Philadelphia Fed President Anna Paulson indicated that further increases may be needed if inflation remains elevated.

US Treasury yields continued to rise alongside the shift in rate expectations, with the 30-year yield moving above 5.45% to its highest level since 2004. Market pricing indicated around a 69% probability of another 25-basis-point Fed increase in October. Attention now turns to today’s US Durable Goods Orders and final Michigan Consumer Sentiment figures for further information on the US economic and inflation outlook.

---

Other Currencies: Kiwi Near Recent Lows as Yen Recovers

AUD/USD: 0.7020 | NZD/USD: 0.5650 | USD/JPY: 158.10 | GBP/JPY: 209.00

NZD/USD is trading around 0.5661, close to an eleven-week low. The New Zealand dollar has remained subdued even as expectations for further Reserve Bank of New Zealand (RBNZ) tightening have increased.

Interest-rate pricing now implies around an 87% probability of another RBNZ rate increase in October, up sharply from around 20% earlier this month. The shift has coincided with concerns that sustained higher oil prices could lift near-term inflation above the central bank’s latest forecasts, although policymakers have also highlighted an uneven domestic economic recovery.

The US and China also agreed to extend their existing trade truce following Thursday’s talks. The development may be relevant to New Zealand’s trade outlook given its close economic links with China, although NZD/USD remains near recent lows alongside broader moves in global rate expectations.

---

Current Rate Table

---

Market Lookahead

Friday, Sep 25

• US Durable Goods Orders (Aug)
• Fed President Williams Speech

Monday, Sep 28

• BoE Deputy Governor Ramsden Speech
• US Dallas Fed Manufacturing Business Index (Sep)

---

Stay Ahead in the Currency Game

Whether you're a daily FX trader or handle international transactions regularly, our 'Currency Pulse' newsletter delivers the news you need to make more informed decisions. Receive concise updates and in-depth insights directly in your LinkedIn feed.

Subscribe to 'Currency Pulse' now and never miss a beat in the currency markets!

---

Ready to act on today’s insights? Get a free quote or give us a call on: +44 (0)20 7740 0000 to connect with a dedicated portfolio manager for tailored support.

---