After yesterday's trading, the euro managed to claw back losses following a large Asian sell-off that drove the pair to a May 2025 low; the pound showed a similar attempt. Neither fundamental data nor the US dollar puts serious pressure on the euro, and the market steadied somewhat. The situation, however, remains under the control of dollar buyers, and the rebound looks more like a pause than a reversal. The pound followed the same trajectory and still trades in a sideways channel, though the odds of further weakness remain fairly high.
Final services and composite PMI readings for the eurozone matched the preliminary September estimates, according to S&P Global, and that helped the euro recover. The reading was expected to be about 53, while July and August were 51.7 and 51.6. It has been noted previously that Germany delivered its best month in four years in August while France contracted for an eighth consecutive month, and that divergence within the bloc remains the main constraint on a confident euro rally.
The UK data were statistically more significant. The services PMI for Britain came in at 52.1 versus a preliminary 51.7—above expectations—and that helped the pound recover, although the reading remains below August's 52.5. The main support for the pound came from a different line in the report: costs continued to rise rapidly, at the fastest pace since June, and services prices increased on the back of expensive fuel. That signals that inflationary pressure in the country will remain elevated, which argues for a tougher Bank of England stance. Will that be enough to force the policymaker into action? I think not for now. The bank rate stands at 3.75%; three committee members — Pill, Green, and Mann—voted in July for immediate tightening, but the labor market is cooling (payrolled employees fell by 13,000), unemployment is 4.9%, and growth remains mediocre. In the short term the pound benefits while British consumers and service sector companies lose as costly fuel squeezes margins.
US ISM services data also came out yesterday. The activity index fell 0.5 point to 54.9, below the 55.1 forecast, but once again prices were the main story. The prices component rose to 74 from 72.6 in August amid expensive fuel and high rates. New orders remain high, and the employment subindex rose above 50 — after 47.8 in August—meaning the sector returned to hiring. I view this combination as one that will continue to support the US economy and the dollar. The winners here are the dollar; the losers are US consumers and companies paying for fuel and imports, while the euro and pound saw little direct benefit from these figures.
Markets still expect the Fed to hold rates on October 28 and to focus on a December hike. Recall that after the weak September jobs report—where payrolls rose by only 29,000—the probability of an October move fell to about 20% from 70%, and last Friday's euro and pound bounce reflected that. But ISM prices and expensive oil bring inflation back to the center of discussion, and market pricing still treats a December tightening to the 4.00–4.25% range on December 9 as the baseline scenario. I believe the tension between a cooling labor market and stubborn price data is what keeps the dollar strong. The minutes of the September meeting, due midweek, will show how unified the committee was.
Now let us look at today's economic calendar. In the first half of the day Germany will release August factory orders, expected to fall 1% after a 2.5% surge in July. For an export-dependent economy this is an important indicator: net exports were the main contributor to eurozone growth in Q2, but against the backdrop of July's jump the decline looks like a pullback, and I do not expect a strong euro reaction. French industrial production and eurozone retail sales for August are unlikely to attract traders' attention. Eurozone retail sales are forecast to rise 0.3% after a 0.6% decline in July, but the market now watches Paris and Madrid politics rather than consumers. Of greater importance is the UK construction PMI. The sector faces serious stagnation: the index is expected to edge up from 44.3 in August to only 45, and any reading below 50 means contraction. A disappointing print could hit the pound hard, since construction previously recorded a 2.3% annual decline. Catherine Mann of the Bank of England, a hawk, will speak; after yesterday's cost data, her remarks could underpin the pound.
US releases include ADP private payrolls, the trade balance, and the economic optimism index. The trade balance merits attention since the goods deficit has widened to $118.8 billion, and the new figure will show how expensive fuel is affecting external accounts. The main point for the US session is different: speeches by Michelle Bowman and Jeff Schmid from the Fed will matter. Amid weak labor data, hawks may take a more cautious, defensive tone. Bowman has been listed among potential dissenters to further hikes, while Schmid previously said policy is not restraining the economy, so the tone of both is important for December expectations. Any easing of dollar pressure could restore demand for risk assets, notably the euro and the pound.
EUR/USD
For buyers, the key level is 1.1200. A decline to that level that forms a false break would be a reason to add longs in expectation of a correction toward 1.1233, with a further target at 1.1259. From 1.1233 and 1.1259, I would consider shorts only on failed holds, and I would look to sell rallies from 1.1284 for a 20–25 pip move. If buying interest does not materialize at 1.1200, it is better to wait for a new monthly low near 1.1165, where longs are also allowed only after a false break, or to consider bounce buys from 1.1133 aiming for a 25–30 pip correction.
GBP/USD
The situation is more stable. I consider buying from 1.3191—this level formed yesterday and worked well—so a fall that produces a false break would again be a reason to add longs targeting a recovery to 1.3227. Only a breakout and hold above that band would push the pound toward 1.3254; a farther target is 1.3389, where I would sell the first rebound for 20–25 pips. On rallies within the channel, I sell from 1.3227 and, on a false breakout, from 1.3254. If buying interest at 1.3191 fails, a break of the range with a failed hold would open the path to new monthly lows and continue the downtrend observed since September 10. The nearest target then would be 1.3161, where longs are allowed only on a false break, and I would buy a bounce from 1.3128 for a 25–30 pip move.
I lean toward the view that while the Fed must weigh both weak employment and ISM price readings, the dollar will keep the edge over the euro and pound, and rebounds in the pairs will stall at resistance around 1.1233–1.1284 and 1.3227–1.3254. The euro is better defended by European data, but political risks in France and Spain remain, and the pound needs either a weaker dollar or a strong signal from the Bank of England. I would risk saying that today's dynamics will be set by the Bowman and Schmid speeches, and until the Fed minutes midweek pairs remain in narrow ranges. I do not rule out that weak UK construction data could push the pound to the channel bottom before the market has time to digest Mann's remarks.
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