Fed holds as dollar falters and sterling steadies
Market overview
Global currency markets are navigating an increasingly complex environment, with shifting interest rate expectations, persistent inflation and concerns over economic growth creating fresh opportunities and risks across major currencies. Diverging central bank policies remain a key driver of exchange rates, while higher energy prices, sovereign debt pressures and fiscal developments are adding further uncertainty. The dollar is struggling to establish momentum, sterling is showing resilience and the euro faces renewed challenges as investors search for clearer direction.
Market sentiment remains cautious as attention shifts towards a busy schedule of economic releases and monetary policy decisions. The Federal Reserve's latest announcement has offered limited support to the dollar, while the European Central Bank faces a difficult balancing act between inflation and financial stability. Meanwhile, a measured UK Budget has helped contain sterling volatility, leaving upcoming central bank guidance and inflation figures firmly in focus.
USD: Dollar struggles to build momentum following Fed decision
The Federal Open Market Committee (FOMC), chaired by Federal Reserve Chair Kevin Warsh, maintained interest rates at 3.75% to 4.00%, broadly matching expectations. However, the decision provided little lasting support for the dollar. Two policymakers favoured further tightening, but Warsh offered no firm commitment to a December increase, reiterating the importance of incoming economic data. Shorter-dated Treasury yields subsequently declined, reducing the dollar's interest rate advantage.
Today's US GDP and PCE inflation releases could provide the next catalyst. Headline and core PCE are expected to reach 3.6% and 3.1% respectively. Softer figures would strengthen expectations that interest rates may have peaked, potentially weighing further on the greenback. Conversely, stronger inflation could reinforce expectations of additional tightening, with markets currently pricing approximately 65 basis points of further increases over the next year.
GBP: Sterling steadies as UK Budget avoids unwanted surprises
Sterling has emerged relatively unscathed from a UK Budget that prioritised fiscal stability over major policy changes. Chancellor John Healey maintained the government's commitment to fiscal consolidation while introducing targeted cost-of-living support and modest spending measures. Gilts rallied, although the pound edged slightly lower. Fiscal headroom narrowed to £15 billion from £23.6 billion in March, broadly matching expectations and helping to reassure investors.
The longer-term growth outlook remains less encouraging. The OBR raised its 2026 GDP forecast to 1.2% but lowered its 2027 projection to 1.0%, highlighting continued economic challenges. Attention now turns to the Bank of England's Monetary Policy Committee, chaired by Governor Andrew Bailey, which is due to announce its next interest rate decision on 5 November. With a rate increase almost fully priced, sterling may consolidate as traders await further guidance.
EUR: Euro under pressure as ECB faces difficult policy choices
The euro faces a challenging backdrop ahead of today's European Central Bank policy announcement. Despite an 18% increase in Brent crude prices this month, expectations for additional tightening remain relatively unchanged, with markets pricing approximately 75 basis points of increases through the end of 2027. Weaker eurozone economic data and persistent concerns surrounding French government debt have strengthened the case for caution.
The ECB's Governing Council, led by President Christine Lagarde, faces a difficult decision. A more accommodative message could weaken the euro by widening policy divergence with the Federal Reserve, while maintaining a restrictive stance risks increasing pressure on sovereign debt markets. EUR/USD continues to find support around 1.11, leaving the single currency vulnerable to further losses towards the low 1.10s should today's communication disappoint.
Looking ahead
US GDP: Growth figures will provide insight into the resilience of the US economy and the outlook for Federal Reserve policy.
US PCE inflation: A crucial release for the dollar, with unexpected readings likely to influence Treasury yields and future interest rate expectations.
ECB decision: Christine Lagarde's comments will be closely monitored for signals on further tightening and the eurozone's economic outlook.
Bank of England: The Monetary Policy Committee's 5 November decision remains a key event for sterling, with attention focused on future rate guidance.
FX market direction: EUR/USD support around 1.11 remains important, while shifting bond yields and monetary policy expectations could generate further volatility across major currency pairs.