US Dollar Weakens While Fed's Williams Sees No Need for Further Rate Hikes in 2027

The US dollar declined on Tuesday and remained under pressure in early Wednesday trading as investors reassessed the Federal Reserve (Fed) interest-rate outlook. The US Dollar Index (DXY) fell around 0.37% to 102.18 during Tuesday's session and slipped towards 102.09 on Wednesday. New York Fed President John Williams said one further rate increase could be appropriate in 2026, but he currently saw no need for additional increases in 2027.

Williams expected inflation to ease towards the Fed's 2% target next year, although he stressed that future decisions would depend on incoming economic data. Interest-rate markets assigned roughly a 77% probability to unchanged rates at the October Fed meeting. Lower oil prices and concerns about valuations linked to US artificial intelligence investment also coincided with weaker dollar demand.

Sterling strengthened against the dollar as Bank of England (BoE) policymaker Megan Greene said the International Monetary Fund's improved UK growth forecast reinforced her view that interest rates were not particularly restrictive. The euro also recovered against the dollar. European Central Bank (ECB) President Christine Lagarde said France should address its debt concerns through domestic fiscal measures rather than expect central-bank intervention.

September's US Consumer Price Index, due later on Wednesday, could influence expectations for further Fed tightening and the near-term direction of major currency pairs.

---

GBP: Sterling Gains as BoE's Greene Questions Restrictive Rates

GBP/USD: 1.3262 | EUR/GBP: 0.8446

Sterling strengthened against the US dollar during Tuesday's session and extended its recovery into early Wednesday trading, with GBP/USD reaching approximately 1.3262. The advance coincided with a weaker dollar following Federal Reserve policymaker John Williams' comments on future interest rates. Sterling's performance also coincided with comments from Bank of England (BoE) policymaker Megan Greene, who argued that current UK borrowing costs might not be sufficiently restrictive to contain inflation.

Greene's remarks followed the International Monetary Fund's (IMF) decision to raise its UK economic growth forecast for 2026 to 1.3% from 1.0%. She said the improvement reinforced her assessment that the BoE's current 3.75% interest rate was not substantially restricting economic activity. Meanwhile, BoE Governor Andrew Bailey highlighted growing caution among British businesses, noting that companies were increasingly focused on containing costs. He also indicated that the wider inflationary impact of higher energy prices had remained relatively limited so far, although prolonged pressure could affect employment and wages.

Against the euro, sterling remained close to its strongest levels in approximately 16 months, with EUR/GBP trading around 0.8445. Expectations of further BoE tightening may have provided some support for the pound, although some analysts questioned whether markets were anticipating too many increases in 2027. A new survey of UK finance directors also showed that 68% regarded cost reduction as a major priority, compared with 53% previously, highlighting continued pressure on business activity. Wednesday's US inflation figures and Thursday's UK GDP release could influence GBP/USD and EUR/GBP through changes in expectations for future Fed and BoE interest-rate decisions.

Key technical reference levels for GBP/USD: Resistance sits near 1.3290, followed by 1.3375, while support sits around 1.3200, followed by 1.3150.

Key technical reference levels for EUR/GBP: Resistance sits near 0.8450, followed by 0.8500, while potential support sits around 0.8405, followed by 0.8370.

---

EUR: Euro Recovers as ECB Assesses Inflation and Financing Risks

EUR/USD: 1.1202

The euro strengthened against the US dollar during Tuesday's session, with EUR/USD recovering from recent lows near 1.1150 and extending its gains towards 1.1202 in early Wednesday trading. The recovery coincided with a weaker dollar and a retreat in US Treasury yields, although the pair remained below its recent trading range. Fresh European Central Bank (ECB) commentary also highlighted the competing pressures influencing eurozone monetary policy.

ECB President Christine Lagarde said France should address its debt difficulties through domestic fiscal measures rather than rely on central-bank intervention. Her remarks may have tempered expectations of direct ECB support for French government bonds. Separately, Lagarde acknowledged that elevated eurozone inflation was largely linked to higher energy prices, but said there was no clear evidence yet of wider secondary inflation effects. The ECB is monitoring wage negotiations for early indications that higher costs are spreading more broadly through the economy.

ECB Chief Economist Philip Lane also highlighted the potential influence of artificial intelligence investment on eurozone financial conditions. He suggested that subdued hiring and the potential replacement of some jobs could weaken workers' bargaining power and moderate wage growth. At the same time, borrowing associated with AI investment may have contributed to upward pressure on long-term interest rates and tighter financial conditions. These developments could influence how much additional monetary tightening the ECB considers necessary.

Attention now turns to Wednesday's US inflation figures, which could alter Fed rate expectations and influence EUR/USD. Stronger-than-expected inflation could support the dollar, while softer figures could reduce expectations for further US rate increases.

Key technical reference levels for EUR/USD: Resistance sits near 1.1303, followed by 1.1350, while support sits around 1.1153, followed by 1.1100.

---

USD: Dollar Declines While Fed's Williams Signals Limited Further Tightening

DXY: 102.09

The US dollar extended its decline during Tuesday's session and weakened further in early Wednesday trading, with the US Dollar Index (DXY) falling towards 102.09 after closing the previous session near 102.18. The decline coincided with easing US Treasury yields and a reassessment of Federal Reserve (Fed) interest-rate expectations following fresh comments from policymakers.

New York Fed President John Williams maintained that one additional interest-rate increase could still be appropriate in 2026 but indicated that further tightening might not be necessary in 2027. He expected inflation to move closer to the Fed's 2% target next year, partly as the effects of tariffs and elevated energy prices diminish. However, Williams acknowledged that the outlook remained dependent on incoming economic data, leaving the possibility of further policy adjustments open.

Fed Governor Christopher Waller offered a different perspective on the recent rise in Treasury yields, arguing that stronger economic growth, artificial intelligence investment and concerns about government debt were important contributing factors. He said longer-term inflation expectations remained well anchored, suggesting that rising borrowing costs did not necessarily reflect expectations of persistently higher inflation. Despite the more cautious tone from policymakers, interest-rate markets continued to price approximately 75 basis points of additional tightening by late 2027, while assigning around a 77% probability to unchanged rates at the Fed's October meeting.

Attention now turns to September's US Consumer Price Index (CPI), due later on Wednesday. Annual headline inflation is expected to increase to 3.6% from 3.4% in August. A stronger-than-expected reading could increase expectations for further Fed tightening and support the dollar, while softer figures could reduce those expectations. The Fed's Beige Book, also scheduled for Wednesday, may provide additional evidence on economic activity, employment and price pressures.

---

Other Currencies: Australian Dollar Gains Amid China Trade Data While BoJ Outlook Shifts

AUD/USD: 0.7001 | NZD/USD: 0.5625 | USD/JPY: 158.19

The Australian dollar strengthened against the US dollar during early Wednesday trading, with AUD/USD rising towards 0.7001 following stronger-than-expected Chinese trade figures. China's exports increased 36.3% year-on-year in September, exceeding expectations of 25.5%, while imports rose 31.0%, compared with forecasts of 24.5%. The trade surplus widened to $133.53 billion, providing a positive signal for Australia's largest trading partner and coinciding with renewed demand for the Australian dollar.

Separate Chinese inflation figures presented a more mixed picture. Producer prices increased 5.0% year-on-year in September, up from 3.8% in August and above expectations of 4.5%, reflecting higher energy and commodity costs. Consumer inflation edged up to 0.9% from 0.8%, remaining below the expected 1.0%. The figures may suggest differing inflation pressures at the producer and consumer levels, creating uncertainty over the strength of China's domestic recovery.

Meanwhile, the Japanese yen experienced volatile trading following reports that Bank of Japan (BoJ) officials were inclined to leave interest rates unchanged at their October meeting, while keeping a possible December increase under consideration. Interest-rate markets assigned approximately a 10% probability to an October increase, with expectations of a move by December considerably higher. USD/JPY fluctuated around 158.00-158.50 during Tuesday's session before trading near 158.19 in early Wednesday dealings. The reports suggest that further tightening remains possible, although the timing is uncertain.

The New Zealand dollar also gained against the weaker US dollar, with NZD/USD reaching approximately 0.5625. Attention now turns to Thursday's Australian employment figures and Wednesday's US inflation release, which could influence expectations for interest rates and the near-term direction of these currency pairs.

---

Current Rate Table

---

Market Lookahead

Wednesday, 14 October

• US Consumer Price Index & Core CPI (September)
• US Federal Reserve Beige Book

Thursday, 15 October

• AUD Employment Change & Unemployment Rate (September)
• UK GDP (August)
• US Producer Price Index & Core PPI (September)
• US Retail Sales & Core Retail Sales (September)

Friday, 16 October

• GBP BoE Governor Andrew Bailey Speech
• US Fed Chair Kevin Warsh Remarks
• Eurozone HICP & Core HICP (September)
• US Industrial Production (September)

---

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.

---