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During Thursday’s European trading session, the US dollar index (DXY), which tracks the performance of the dollar against six major currencies, rebounded to a near two-month high of 99.00, after earlier retreating to around 98.70. The rebound follows a three-week dollar rally that faced modest selling pressure after the release of the Federal Open Market Committee (FOMC) September policy meeting minutes.
The FOMC minutes revealed that officials remain optimistic about potential adjustments to interest rates, despite heightened risks in the labor market. Policymakers expressed cautious relief regarding inflation, noting that upside risks to price pressures had either diminished or failed to increase. The committee also signaled that “further policy easing may be appropriate through the remainder of 2025,” suggesting a dovish tilt in the near-term monetary policy outlook.
Traders have responded by pricing in a high probability of rate cuts. According to the CME FedWatch tool, the market currently sees a 78.6% chance of the Federal Reserve reducing rates by 25 basis points at each of its two remaining meetings this year. Market participants awaited additional guidance from Fed Chairman Jerome Powell, who was scheduled to speak at a community bank conference in Washington, D.C., to gauge the broader impact of the ongoing US government shutdown on economic conditions and policy trajectory.
Meanwhile, the British pound underperformed against major currencies amid investor caution over the UK’s economic and fiscal outlook. The pound’s weakness reflects concerns about government spending and potential fiscal tightening ahead of the Autumn Budget scheduled for late November. On Wednesday, Chief Secretary to the Treasury James Murray emphasized that emergency funds would not be used to finance public sector pay rises, highlighting the government’s focus on disciplined fiscal management.
“This cautious but disciplined approach to public spending will help build a stable economy,” Murray stated in a Treasury letter, according to Reuters. Financial markets are increasingly focused on the Treasury’s next steps, anticipating measures such as spending cuts, tax increases, or a combination to contain the country’s growing fiscal deficit. Concerns were further amplified after Chancellor Rachel Reeves announced increased welfare spending in July, raising questions about the sustainability of UK public finances.
Monetary policy considerations are also weighing on sterling. Investors remain divided on whether the Bank of England will cut interest rates at its two remaining meetings this year. The BoE faces conflicting signals: deteriorating employment demand suggests room for easing, while persistent inflationary pressures warrant caution. In a recent speech at the University of Birmingham, BoE Chief Economist Hugh Peel stressed that policy adjustments must prevent inflation from accelerating uncontrollably.
Looking ahead, the next key data release for the pound will be UK employment figures for the three months ending in August, due Tuesday. Analysts anticipate that the report could provide critical insight into labor market conditions and influence expectations for both monetary and fiscal policy.
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