US Dollar Softens as Fed Hike Bets Fade, With Euro and Pound Facing Key Tests

What to Know

• The US dollar has started the week softer after a three-week rise gave way to a two-week low last Friday.
• Market pricing for an October Federal Reserve rate hike has fallen to about 15% from 30% during the speech, while CME FedWatch shows about an 84% chance of a hold at the October 27-28 meeting.
• Traders are still pricing in about a 92% probability of a Federal Reserve rate hike in December.
• The US Dollar Index is trading around 102.01, with 102.18 acting as the first major resistance area and 101.77 as first support.
• EUR/USD is trading around 1.1196 after repeated rejection from the 1.1260-1.1270 resistance zone.
• French political and fiscal risks continue to weigh on the euro, while some analysts expect the European Central Bank to wait before taking a more hawkish stance until December.
• GBP/USD is trading around 1.3316, with 1.3353 acting as first resistance and 1.3302 serving as immediate support.
• UK inflation data is due on October 21, and the Autumn budget is scheduled for October 28, both of which could influence the case for a November Bank of England rate hike.

Dollar Loses Momentum as October Fed Hike Bets Fade

The US dollar has begun the week on softer ground as market participants continue to scale back expectations for an October Federal Reserve rate hike. After advancing for three straight weeks, the US Dollar Index fell to a two-week low last Friday, suggesting that a portion of the recent policy premium has started to unwind. The move reflects a market that is no longer treating a near-term rate increase as the central scenario, even though the broader debate around the December meeting remains very much alive.

Rate expectations have shifted notably. The probability of a rate hike next month has dropped to about 15% from 30% during the speech, while CME FedWatch now shows about an 84% chance that the Federal Reserve leaves rates unchanged at its October 27-28 meeting. That marks a sharp change from a month ago, when the probability of a hold stood at 49%. The dollar’s retreat from its 18-month high reflects that repricing, as traders adjust to a softer near-term policy outlook.

Still, the pullback in October hike expectations has not fully removed the dollar’s policy support. Traders are still pricing in about a 92% chance that the Federal Reserve hikes in December. That means the dollar’s decline may be less about a complete loss of confidence in US rate support and more about timing. In practical terms, the market appears to be shifting from an immediate tightening narrative to a delayed one, which can make upcoming data and central bank commentary especially important for short-term direction.

DXY Technical Picture Centers on 102.18 and 101.77

The US Dollar Index is currently trading around 102.01, with technical traders focused on the rebound from the 101.77 base. That move lifted DXY above the faster moving average and pushed price toward the slower moving average, where the index is now challenging the lower edge of the 102.18 resistance zone. The near-term bounce has improved the short-term tone, but the broader structure remains more cautious because DXY has continued to post lower highs since the 102.94 high.

The first resistance level to watch is 102.18. A clear break above that level would open the door toward 102.60, followed by the 102.94 high. On the downside, 101.77 is the first support level, with 101.58 marking the recent swing low. Below those levels, further support is seen at 101.34 and then 101.03. This creates a clearly defined technical range for traders watching whether the dollar can rebuild upward momentum or whether the recent pullback resumes.

Momentum indicators are offering a mixed but slightly firmer short-term signal. RSI has moved up to around 58 and crossed above its signal line at 49, which supports a short-term bullish reading. Even so, many technical traders may remain neutral while DXY trades between 101.77 and 102.18. A break above 102.18 would strengthen the case for a move toward 102.60, while a break below 101.77 would shift attention back to 101.58 and suggest that sellers are regaining control.

Euro Pressured by French Fiscal Risk and ECB Caution

The euro has started the week under pressure, carrying forward the weakness seen at the end of last week. Investors remain concerned about the political backdrop in France, the country’s fiscal position, and the wider implications for Europe. These concerns have limited the euro’s ability to capitalize on the softer US dollar, showing that EUR/USD is being driven by more than just broad dollar direction.

Adding to the headwinds, some analysts believe the European Central Bank may take a wait-and-see approach rather than shifting toward a more hawkish stance before December. That kind of policy posture can make it harder for the euro to build sustained upside, particularly when fiscal uncertainty is already acting as a restraint. ECB executive board member Frank Elderson is due to speak later today, and markets may look for any signals about how policymakers are balancing inflation risks, growth concerns, and financial conditions.

EUR/USD Faces Bearish Pressure Below 1.1270

EUR/USD is currently trading around 1.1196 on the 1-hour chart. The key technical feature is the fourth rejection from the 1.1260-1.1270 resistance area, which also aligns with the bearish trend line drawn from the highs of late September. That repeated failure to break higher has reinforced the view among some chart watchers that sellers continue to defend the upper boundary of the recent range.

The pair has recently traded below the 20 and 50 hour moving averages, another sign that the short-term tone remains weak. After peeling away from the 1.1222 area, EUR/USD appears vulnerable to a retest of 1.1152 or possibly lower if selling pressure extends. The first area of potential support is 1.1188, followed by the next major support area around 1.1113. On the upside, 1.1240 and the bearish trend line are likely to act as resistance, with 1.1270 serving as the next major ceiling.

Momentum remains soft but not stretched. RSI is around 38 and has crossed below its signal line near 48, suggesting that downside pressure could continue, though the pair is not yet oversold. The trend remains lower until proven otherwise, with 1.1188 acting as the first major support area if the pair pulls back further. A close above 1.1270 would weaken the bearish setup and suggest that euro bulls have finally broken through a key barrier.

Pound Holds Firmer Ahead of UK Data Deluge

Sterling is holding up better than the euro as markets prepare for a heavy run of UK data that could influence expectations for a November Bank of England rate hike. Such a move would be the first rate hike since August 2023. Earlier in the month, Bank of England Governor Bailey expressed frustration with elevated inflation, which remains well above the Bank’s target, while also suggesting that UK growth and the wider economy have been more resilient than expected.

That backdrop makes the coming data important. UK inflation figures are due on October 21, and the Autumn budget is scheduled for October 28. Together, these events could help determine whether markets continue to support the case for a November hike or begin to question whether the Bank of England has enough justification to move again. For GBP/USD, the result may be a period of sensitivity around both domestic data and broader dollar moves.

GBP/USD Stalls Near Fibonacci Resistance

GBP/USD is currently situated around 1.3316. The recent advance stalled within the 1.3353-1.3404 resistance zone, which represents the 50% and 61.8% Fibonacci retracement levels from the decline that began at 1.3569. Sellers also defended this zone in mid-September, which gives the area added technical significance for traders monitoring whether the pound can extend its recovery.

The pair has since moved lower and is sitting near the 100-hour SMA at 1.3302, which also corresponds to the 38.2% retracement level. The first resistance level is 1.3353. A close above that level would open the 1.3404 area, and beyond that, attention would shift to 1.3569. On the downside, 1.3302 is the first support zone, followed by 1.3239, which is the 23.6% retracement, and then the 1.3137 low.

For now, GBP/USD appears to be positioned between a resilient domestic rate story and a technically important resistance area. If UK data reinforces the case for a November hike, sterling could find renewed support. If the data weakens that argument, the pair may struggle to clear the 1.3353-1.3404 zone and could instead drift back toward lower support levels.

Market Outlook

The broader currency market is being shaped by a shift in central bank expectations rather than a single directional theme. The dollar has lost some support as October Federal Reserve hike bets fade, but December expectations remain high enough to keep the currency from breaking down decisively. The euro is under pressure from French fiscal and political risk, while sterling is holding up ahead of UK inflation data and the Autumn budget.

For DXY, the 102.18 resistance level and 101.77 support level are the immediate boundaries to watch. EUR/USD remains vulnerable while it trades below the 1.1260-1.1270 resistance zone, and GBP/USD needs to reclaim 1.3353 to improve its near-term outlook. Until these levels break, traders may continue to treat the major currency pairs as range-bound but vulnerable to sharp moves around policy signals and economic data.

Frequently Asked Questions (FAQs)

Why is the US dollar softer this week?

The dollar is softer because expectations for an October Federal Reserve rate hike have fallen sharply. Market pricing now shows only about a 15% probability of a hike next month, while the chance of a hold at the October 27-28 meeting has risen to about 84%.

Does the market still expect the Federal Reserve to hike rates?

Yes, traders are still pricing in about a 92% chance of a Federal Reserve rate hike in December. The main change is that the market has become less convinced that a hike will happen at the October meeting.

What is the key resistance level for the US Dollar Index?

The key near-term resistance level for the US Dollar Index is 102.18. A clear break above that level would bring 102.60 into focus, followed by the 102.94 high.

What support levels matter for DXY?

The first support level for DXY is 101.77. If that level breaks, traders may focus on 101.58, followed by 101.34 and 101.03.

Why is the euro under pressure?

The euro is being pressured by concerns over France’s political and fiscal situation, along with uncertainty about the wider European backdrop. Some analysts also expect the European Central Bank to avoid a more hawkish shift until December.

What are the main EUR/USD levels to watch?

EUR/USD is trading around 1.1196, with first support at 1.1188 and a major support area near 1.1113. Resistance is seen around 1.1240, followed by the 1.1260-1.1270 zone.

Why is the British pound holding up better?

The pound is holding firmer because markets are watching UK data that could support the case for a November Bank of England rate hike. UK inflation data is due on October 21, and the Autumn budget is scheduled for October 28.

What are the key GBP/USD technical levels?

GBP/USD is trading around 1.3316, with first resistance at 1.3353 and the next resistance area at 1.3404. Immediate support is near 1.3302, followed by 1.3239 and 1.3137.

What could change the current currency outlook?

A breakout in DXY above 102.18, a close in EUR/USD above 1.1270, or a GBP/USD move above 1.3353 could shift the technical picture. Upcoming central bank commentary and UK data could also influence short-term direction.