06.10.202609:20 Forex Analysis & Reviews: Market now doubts even rate hike in December

The dollar eased slightly yesterday after the ISM services report, but it remained strong. Budget woes and renewed political uncertainty in Europe are supporting the dollar against riskier currencies such as the euro and the pound sterling, so the US currency retains safe-haven appeal. The report itself was not weak: the ISM services activity index fell 0.5 points to 54.9, and readings above 50 still signal expansion. The decline was small, so the dollar's reaction was muted.

The key takeaway from the report is not the pace of activity but prices. The ISM prices paid index rose to 74 — the highest since July 2022 and the largest jump in service sector costs in more than four years. For comparison, it was 72.6 in August and near a one-year low in February, just before the Iran conflict intensified. The chain is straightforward: the war pushed up fuel, fuel raised input costs, and companies pass those costs on to customers. ISM committee chair Steve Miller noted that fuel was mentioned by respondents twice as often as any other issue, and tariffs remain a notable factor. The losers are consumers and small businesses forced to pay higher energy and logistics bills.

Supply chain strain is also visible. The report showed supplier-delivery times at their longest since June; logistical constraints hurt both order fulfilment and cost structures. The backlog index hit its highest level since July 2022 — companies have accumulated a large volume of unfilled work. New orders fell 1.1 points to 59.8 but remain among the strongest readings of recent years. Demand thus holds up, and that makes services different from other parts of the economy, where employment and hiring are softer. Resilient consumer spending and sizable business investment continue to support the sector.

The services labor picture looked calmer than the weak overall September print, which showed only +29k jobs. ISM's employment index rose to 50.1 — back into expansion for the first time since June (it was 47.8 in August). Companies remain cautious in hiring, balancing demand and rising costs.

For the Federal Reserve, the combination of firm demand and soaring prices is awkward. The market has priced a pause for the October 28 meeting and a 25-bp hike on December 9 — taking the terminal range to 4.00–4.25% after September's move to 3.75–4.00%. Several Fed officials have already signaled varying views: Neel Kashkari and Lori Logan have talked about more tightening; Logan expects less than 50 bps of additional hikes in the cycle, while John Williams and Philip Jefferson even see the possibility of a pause until fresh data arrive. The September meeting minutes, due midweek, will reveal how deep the split within the committee is.

In my view, the dollar will remain resilient in the coming sessions, and any pullback will likely be short-lived while Paris, Madrid, and London remain sources of risk. A sustained weakening of the dollar would require either an unexpectedly hawkish move from the ECB or a stabilization in French politics.

Technical outlook for EUR/USD

Buyers should be thinking about taking 1.1230. Only that would allow a test of 1.1259. From there, a move to 1.1307 would be possible, but doing so without support from big players will be difficult. On the downside, I expect serious buyer interest only around 1.1200. If there are no buyers there, it's prudent to wait for a new low at 1.1165 or consider longs from 1.1133.

Technical outlook for GBP/USD

Pound buyers need to take the near resistance at 1.3225 to target 1.3265 — above which further gains will be difficult. The next extended target is around 1.3300. On the downside, bears will try to seize 1.3180; a confirmed break would damage bull positions and push GBP/USD toward 1.3145 with a prospect of extending to 1.3110.