The euro and pound rallied after US data showed strong growth but no nasty inflation surprises. The logic is straightforward: strong GDP usually lifts the dollar because it raises the odds of Fed tightening. This time, the growth print came with prices that matched expectations, and that prevented the dollar from extending its rally.

Let's start with growth. US GDP rose by 3.4% annualized in Q3 after 2.2% in Q2, the fastest pace in a year and above the median economist forecast. Business investment led the expansion, jumping by 12.7%, the strongest gain since 2020. Equipment spending contributed to an expansion, not seen since 2011, apart from a post-pandemic recovery. Much of this capex is tied to AI infrastructure, although investment has broadened to other categories as well.

Household spending supported the economy but less forcefully. Consumer spending rose by 3.8% for a second consecutive quarter, despite inflation eating into real wages and keeping confidence subdued. Inventories added 1.6 percentage points to growth. Offsetting factors included a 3.3 percentage-point drag from net exports as imports surged for data-center equipment and pre-tariff shipping, and a housing sector that is weighed down by mortgage rates that recently approached 7.5%.

Now the price story — and that's what mattered for FX. The Fed's preferred inflation gauge, the PCE price index, rose by 0.5% month?over?month in September, marking the fastest monthly increase since March, while core PCE (ex food and energy) gained 0.3% m/m, matching expectations (and versus 0.2% previously). Both prints matched forecasts. In short, price pressures increased but not beyond market expectations, so they did not add fresh justification for a more aggressive Fed stance. Note that on a year?over?year basis, core PCE is still elevated at roughly 3.6% versus a 2% target, so the market still prices in a December rate hike, but there was no reason to push those odds higher.

Inside the report, the US consumer looked weaker than the headline GDP suggested. Real consumer spending in September was essentially flat after a sharp advance the month before, as households cut back on auto and big-ticket purchases. Real disposable income fell for the first time since April, and the personal saving rate dropped to 3.8%, its lowest since late 2022. That is an inconvenient signal for the dollar because it underlines that growth is running off a limited buffer.

Thus, the Fed faces a mixed picture. Kevin Warsh emphasized economic strength and the Fed's commitment to tame inflation, citing resilient domestic spending, strong productivity, and high business investment. The Fed held interest rates unchanged at the meeting, and investors still expect a December rate hike. That explains why the euro and pound were able to reclaim some losses: the dollar received confirmation of underlying US strength but did not gain a fresh policy justification, while weaker consumer incomes created doubt about the durability of demand.

European currencies were in a position to benefit from any neutral US signal. Buyers of the euro and pound were waiting for a pause in dollar gains; those bets paid off as the dollar failed to find renewed traction.

I expect the euro and pound to hold a moderate bounce in the coming days so long as US price data remains non-surprising. But sustaining that rally will be difficult: a December Fed hike remains the base case, and expensive energy could reignite inflation pressures.

As for EUR/USD technicals, the immediate task for buyers is reclaiming 1.1195. That would open a test of 1.1210 and then 1.1230, although moving above those levels without support from large players would be difficult. On the downside, watch for buying interest around 1.1130. If that fails, wait for a break below 1.1110 or consider long positions closer to 1.1080.

As for GBP/USD technicals, buyers need to take the nearest resistance level of 1.3405 to target 1.3435. Clearing that level would open the path to 1.3465. On the downside, bears will try to take control at 1.3365. A break below that level would drag GBP/USD down to 1.3330, potentially opening the path toward 1.3295.