Dollar Gives Back Its Gains After Hot US Inflation: Pound, Euro and Dollar Update

    At a glance: 

Read on for a closer look at the moves and what could come next.

What happened on Wednesday
US prices rose 0.6% in September, taking annual inflation to 3.7% from 3.4%. Petrol accounted for more than half of the monthly rise.
Core inflation, which strips out food and energy, rose 0.3% against the 0.2% expected. That lifted the annual rate to 2.6% from 2.4%.
Increases across goods and services raised concerns that inflation pressures are broadening beyond energy. After a weak jobs report earlier this month, markets had scaled back expectations of an October Fed rate rise. Wednesday’s figures brought that possibility back into focus.
Higher expected US interest rates supported the Dollar. The euro fell to its lowest against it in around 18 months, and the pound to its lowest in over a year.

Why the Dollar has fallen back
By Thursday morning, the euro had recovered all of Wednesday’s fall and the pound most of it.
Comments from senior Fed officials helped temper expectations for an October rise. Vice Chair for Supervision Michelle Bowman and San Francisco Fed President Mary Daly have both signalled the central bank can wait for clearer data before deciding on its next move.
US borrowing costs eased, and traders scaled back bets on an October rise. Heavy bets against the euro may also have amplified its rebound as traders closed positions.

The Fed raised rates in September, and most officials expect another increase before year-end. But the timing remains uncertain. Chair Kevin Warsh’s comments on Friday could influence expectations, leaving the Dollar sensitive to both incoming data and central bank signals.

EUR/USD: a bounce, but the pressures remain
The euro remains well below its summer levels, meaning businesses buying Dollars with euros face higher costs than they did a few months ago.
Two pressures remain. The first is interest rates: the prospect of further Fed rises relative to the ECB continues to favour the Dollar.

The second is France. Its budget debate began in parliament on Tuesday, with government debt standing at 119% of the size of its economy. Higher borrowing costs risk making the public finances harder to manage, prompting further selling of French debt.

The ECB has a tool to address unwarranted, disorderly bond-market movements, subject to eligibility conditions. Support for France should therefore not be assumed.
Progress on the French budget or softer US data could help the euro recover further. Continued fiscal uncertainty or stronger US figures could put it under renewed pressure.

GBP/USD: recovering, with the Budget ahead
The pound recovered most of Wednesday’s fall against the Dollar on Thursday morning.
The UK also received some encouraging news: the economy grew 0.1% in August when a small fall had been expected, and factory output rose sharply.

The bigger test lies ahead. The UK Budget and Fed decision both fall on 28th October, bringing significant risks from both sides of GBP/USD on the same day.
A Budget that reassures investors about the public finances could support sterling. Borrowing above market expectations could weigh on it, although the reaction will also depend on the growth outlook and the measures announced.

GBP/EUR: a fresh high, then a reversal
The pound briefly reached its strongest against the euro since mid-2025 on Wednesday, then gave the gain back within hours.
It was the second consecutive day sterling retreated from the same area, suggesting its recent momentum may be fading. A pause or modest pullback would not be unusual after a sharp rise, although France’s difficulties remain a potential source of support for GBP/EUR.

UK borrowing costs: context matters
UK 30-year borrowing costs passed 6% this month. While high, their rise has been broadly in line with those of other major economies, suggesting global pressures rather than a loss of confidence specific to the UK.
That offers some reassurance ahead of the Budget. However, tight public finances leave little room to absorb further increases in borrowing costs.

Markets also anticipate a Bank of England rate rise on 5th November. How much support that gives sterling will depend on what is already priced in and the Bank’s guidance on subsequent decisions.

Key dates
 

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Frequently asked questions
Why did the Dollar rise and then fall back?
Stronger US inflation initially increased expectations of another Fed rate rise. Cautious comments from Fed officials subsequently helped temper those expectations, allowing the pound and euro to recover.

Will the Fed raise interest rates in October?
A rise remains possible, but is not assured. Upcoming data and Fed communications will influence expectations ahead of the decision.

Why is the euro still under pressure?
The prospect of further US interest rate rises and concerns about French public finances remain headwinds, despite Thursday’s rebound.

What does the UK Budget mean for the pound?
Investors will assess the balance between borrowing, taxation, spending and growth. The pound’s reaction will depend on how the measures compare with market expectations.