By mid-Thursday, European currency was gaining firmly against the dollar, and the pound also attempted a similar advance. The trigger was data from Germany and Italy, but by the US session initiative shifted to the dollar, and by evening the euro and pound had given up most of their morning gains.
Germany reported unemployment unchanged at 6.4%, although the level of unemployed people exceeded economists' expectations, suggesting some cooling in the labor market. More notable was the consumer price series: in September consumer prices jumped 0.6% after a 0.2% rise in August, and the annual rate climbed to 3.3% from 2.9% a year earlier. The ECB's target is 2%, and this gap strengthens the hand of those on the Governing Council favoring tighter policy rather than those calling for a pause.
Italy's data reinforced the narrative. Prices rose 0.7% in September after 0.5% in August, and annual inflation exceeded 4% at 4.2%. Two consecutive releases showing acceleration exert more pressure on the ECB than any single print, and that is why the euro held its ground into midday.
Then attention turned to the United States. The ADP report for private sector employment came in notably stronger than expected: consensus was 70,000 new jobs, but actual payrolls rose by 90,000 in September. For the dollar, that was a direct buy signal, because a resilient labor market loosens constraints on the Fed to continue fighting inflation. European currencies were the losers, surrendering the morning's momentum.
PCE spending data added ambiguity. Real spending in August rose 0.6%, the strongest monthly gain since March 2025, indicating resilient consumer demand. But the core PCE index—the Fed's preferred inflation gauge excluding food and energy—rose only 0.2% versus expectations of 0.3%, and the annual core rate came in at 3.0% versus a 3.3% forecast. The story is therefore two-edged: spending accelerates while core inflation ticks down slightly, though it remains well above the central bank's target.
Against that backdrop, the market assigns only a 35–36% probability to an October Fed hike. Ahead of the midterms, that outcome suits the Trump administration more than another tightening step. I lean toward thinking the Fed will indeed pause in October and defer the decision to December if inflation signals continue to build. In that case downward pressure on the euro and pound would likely persist over the medium term.
Today's calendar could alter the picture. Final manufacturing PMIs for France, Germany, and the euro area are due; the euro area PMI consensus is 52.7, level with August. UK manufacturing PMI is also expected to be around 52.0, but readings above 50 have not yet been sufficient to turn the pound higher. Euro area unemployment is forecast to repeat August's 6.4% and is unlikely to move markets. More important for the dollar is the revised US ISM manufacturing index: consensus is 55 versus 54.6 in August. A beat would give the dollar fresh cause to strengthen against both currencies. The speeches from central bank officials—Fed speakers Michelle Bowman, Philip Jefferson, and Lisa Cook, and ECB President Christine Lagarde—will be watched for signs of unity or divergence within central banks; if the euro and pound receive no support from these remarks, dollar demand will likely endure.
A technical picture for EUR/USD suggests that on the hourly chart, a false break of 1.1312 and a prompt recovery will be a buy trigger targeting the channel mid at 1.1346, though that level is where stronger seller resistance is expected and where moving averages align with sellers. A confirmed break of 1.1312 with a retest from below opens the path to 1.1284 and further to 1.1249, where I would consider buy-the-dip trades for 20–25-pip returns. If bears do not act at the channel mid 1.1346, it is wiser to defer selling until a test of the channel top at 1.1379 with a false break there, or a rejection from 1.1410 for a 25-pip short.
A technical picture for GBP/USD unveils that the initiative currently rests with buyers, but without defending 1.3238, that advantage is fragile. A false break there supports a move to 1.3271; a confirmed close above that opens the way to 1.3307 and then to a weekly high near 1.3341, where I will look to sell the bounce for about 25 pips. A break and hold below 1.3238 is a cue to add shorts aiming back at 1.3206; because that level is being tested for the third time, a break would extend the move to 1.3173, where bounce buys for 20–25 pips are appropriate.
Can the dollar turn its morning retreat into a sustained reversal? I think the ISM and the tone from Fed speakers will provide the answer today. It is possible the euro and pound revisit some of yesterday's losses before the US releases, especially given strong European inflation data, but if the ISM meets or exceeds forecasts, the dollar will likely retake control and keep the euro and the pound under pressure through to the Fed's December meeting.
