The US dollar rebounded on Monday as investors prepared for a busy week of central bank interest rate decisions, while the euro weakened after briefly benefiting from improved sentiment toward French government debt.
Currency markets remained sensitive to geopolitical developments in the Middle East, fluctuating oil prices and changing expectations for monetary policy.
The US Dollar Index, which measures the greenback against six major currencies, advanced 0.17% to 101.98, reversing earlier losses. Meanwhile, the euro declined 0.16% to $1.1185 after initially strengthening during the session.
The British pound also recorded modest gains earlier in the day, rising approximately 0.1% to $1.3385.
US Dollar Recovers as Euro Gives Up Earlier Gains
The euro initially climbed 0.16% to approximately $1.1220 after credit rating agency Moody’s decided against downgrading France’s sovereign debt.
The decision provided temporary relief to European financial markets, which have faced growing concerns about France’s fiscal position and political instability.
However, Moody’s maintained its negative outlook on the country’s credit rating, signaling that risks to its public finances remain significant.
Investors are also awaiting another assessment from S&P Global Ratings, scheduled for November 27.
Consequently, the euro’s early recovery proved short-lived as attention shifted toward upcoming central bank decisions and broader currency market risks.
Oil Prices Retreat as Middle East Tensions Remain Elevated
Energy markets also influenced currency trading on Monday as crude oil prices retreated from recent highs.
Brent crude declined approximately 2% to $114.51 per barrel following reports that Qatari mediators had traveled to Tehran to support diplomatic efforts aimed at reducing regional tensions.
The discussions, conducted in coordination with Washington, offered some hope that further escalation could be avoided.
Nevertheless, geopolitical uncertainty remains elevated after Yemen’s Houthi movement claimed attacks on an airport and oil infrastructure in Saudi Arabia.
Despite Monday’s decline, Brent crude had gained approximately 6% during the previous week.
Persistently high energy prices remain a major concern for central banks because they can increase transportation, production and consumer costs, potentially strengthening inflationary pressures.
Federal Reserve Decision Could Determine Dollar’s Next Move
The Federal Reserve will begin its two-day monetary policy meeting on Tuesday, with its interest rate announcement scheduled for Wednesday, October 28.
Financial markets widely expect the central bank to maintain its benchmark interest rate within the current 3.75% to 4.00% target range.
Such a decision would follow September’s quarter-point increase, which marked the Fed’s first rate hike in more than three years.
According to interest rate futures, traders assign less than a 10% probability to another increase this week.
However, market expectations shift considerably toward December, with approximately an 80% probability of a 25-basis-point rate increase.
As a result, investors will closely examine Federal Reserve Chair Kevin Warsh’s press conference for indications about the future direction of US monetary policy.
Any unexpectedly hawkish signals could provide additional support for the dollar, while a more cautious outlook could weigh on the currency.
US GDP and Inflation Data Add to Market Uncertainty
Beyond the Federal Reserve meeting, several important US economic reports are scheduled for release this week.
October’s consumer confidence figures are due Tuesday, providing fresh information about household sentiment and spending expectations.
On Thursday, investors will receive the preliminary estimate of third-quarter US gross domestic product.
Economists expect annualized GDP growth of approximately 3.2%, indicating continued resilience in the American economy.
The September Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, will also be released Thursday.
Headline PCE inflation is forecast to accelerate to 3.6% from 3.4%, potentially reinforcing expectations that monetary policy will remain restrictive.
Weekly unemployment claims will provide another assessment of labor market conditions after claims previously declined to 194,000, their lowest level since July.
Together, these reports could significantly influence US Treasury yields, interest rate expectations and the dollar’s near-term direction.
ECB Expected to Hold Rates as Inflation Remains High
The European Central Bank will announce its monetary policy decision on Thursday, October 29.
Markets generally anticipate that policymakers will leave the deposit facility rate unchanged at 2.50%.
However, inflation remains a major concern across the eurozone, particularly because elevated energy prices continue to increase costs for households and businesses.
Eurozone inflation reached approximately 3.7% in September, keeping pressure on policymakers to prevent further price increases.
ING analysts expect the ECB’s next interest rate hike to come in December, although the timing will depend on inflation developments and economic conditions.
Investors will therefore pay particular attention to the central bank’s guidance for the remainder of the year.
Japanese Yen Volatility Builds Ahead of Bank of Japan Meeting
The Japanese yen experienced further fluctuations ahead of the Bank of Japan’s monetary policy announcement on Friday.
USD/JPY traded around 157.5 after a volatile previous week that saw the currency pair reach 158.68 on October 20 before retreating to approximately 156.06 on Friday.
Safe-haven demand contributed to the yen’s earlier strength, while comments from a Japanese government official suggesting caution toward further tightening influenced subsequent trading.
The Bank of Japan is widely expected to maintain its benchmark interest rate at 1.25%, following two increases earlier in 2026.
Nevertheless, policymakers could maintain a restrictive tone as inflationary pressures persist.
Japan’s core inflation recently moved back above the central bank’s 2% target, while the planned removal of fuel subsidies could add further upward pressure on consumer prices.
Financial markets are also anticipating another possible interest rate increase in December.
Chinese Yuan Strengthens as Beijing Manages Currency Gains
Elsewhere in Asia, China’s onshore yuan strengthened to approximately 6.6682 against the US dollar, reaching its highest level since June 2022.
However, the People’s Bank of China has attempted to moderate the pace of appreciation through weaker-than-expected daily exchange rate fixings.
The central bank’s approach reflects efforts to manage currency volatility while maintaining financial stability.
Investors are also monitoring China’s fifth plenum, which began Monday and continues through Thursday.
The political gathering could provide additional insights into Beijing’s economic priorities and policy direction.
Canada and New Zealand Prepare for Interest Rate Hikes
Two additional central banks are expected to announce monetary policy decisions on Wednesday.
The Bank of Canada could increase its benchmark interest rate from 2.25% to 2.50%, with swap markets assigning approximately an 85% probability to the move.
Meanwhile, the Reserve Bank of New Zealand is also expected to tighten monetary policy, potentially raising its official cash rate to 3.00%.
These anticipated decisions reflect concerns about persistent inflation and the need to maintain monetary stability.
The simultaneous policy announcements could generate additional volatility across major currency pairs, particularly those involving the Canadian and New Zealand dollars.
US Dollar Outlook Hinges on Central Bank Guidance
The near-term outlook for the US dollar will depend heavily on how central banks balance inflation risks against economic growth concerns.
Although the Federal Reserve, ECB and Bank of Japan are widely expected to leave rates unchanged this week, their forward guidance could prove more influential than the decisions themselves.
Meanwhile, geopolitical developments, crude oil prices and major US economic releases remain important drivers of investor sentiment.
With five central banks preparing to announce policy decisions, currency markets could experience significant fluctuations as traders reassess future interest rate differentials.
For EUR/USD and other major forex pairs, the key question will be whether central bank guidance reinforces the dollar’s recent recovery or creates conditions for renewed currency weakness.
