Market overview
Global currency markets are navigating a shifting landscape as political developments, central bank expectations and changing investor sentiment compete for attention. Sterling continues to stand out among major currencies, the US dollar has lost some momentum following the midterm elections, and the euro remains constrained by fiscal uncertainty. While risk appetite has become more selective, investors are not abandoning equities altogether. Instead, a rotation away from technology stocks towards more traditional sectors suggests markets are reassessing growth prospects and interest rate expectations rather than preparing for a broader downturn.
The initial relief rally following the US elections has given way to more cautious trading, with South Korea's Kospi falling 5% overnight as technology shares came under pressure. Meanwhile, Brent crude has slipped to its lowest level in over a month as signs of potential diplomatic progress between Washington and Tehran ease immediate supply concerns. However, geopolitical risks remain significant. With a crucial Bank of England decision today and US employment figures due tomorrow, attention is returning to economic fundamentals, setting the stage for potentially sharper currency movements heading into the weekend.
GBP: Sterling's strength faces a crucial Bank of England test
The pound enters today's Bank of England meeting near its strongest trade-weighted level since the 2016 Brexit referendum. GBP/USD has approached 1.35, while GBP/EUR remains close to 1.20, supported by resilient UK economic data, improving investor confidence and relative political stability. Sterling's effective exchange rate index has reached 86.4, matching its highest level in more than a decade.
Markets overwhelmingly expect the Monetary Policy Committee to raise interest rates by 25 basis points to 4.00%, marking the first increase in three years. However, with the decision almost fully priced in, attention will centre on the voting split, updated economic projections and Governor Andrew Bailey's guidance.
Stronger growth, persistent inflation and higher energy costs support the case for tighter policy, although easing wage pressures and declining vacancies suggest underlying inflation risks remain relatively contained. With investors already anticipating substantial further tightening, a cautious message from the Bank could trigger a pullback in gilt yields and sterling. The pound's broader outlook remains constructive, but delivering another meaningful rally may require a more hawkish stance than markets currently expect.
USD: Dollar searches for direction ahead of payrolls
The US dollar has softened following the midterm elections as investors reassess the implications for fiscal policy, technology investment and the Federal Reserve's interest rate outlook. Concerns surrounding tighter AI regulation have weighed on sentiment towards technology stocks, although the broader rotation into traditional sectors suggests underlying confidence in the US economy has not disappeared.
Recent employment indicators have reinforced that resilience. October's ADP report showed private employers added 86,000 jobs, following encouraging JOLTS figures earlier in the week. These releases suggest the labour market remains relatively robust, supporting the argument for the Fed to maintain a restrictive policy stance.
Friday's nonfarm payrolls report now represents the next major test. A stronger-than-expected reading could revive demand for the dollar by reinforcing expectations of higher interest rates, while disappointing figures may extend recent weakness. For now, the dollar index (DXY) appears positioned to defend the 101 level, provided employment data does not deliver a significant downside surprise.
EUR: Inflation rises as fiscal concerns limit euro gains
Eurozone headline inflation increased to 4.0% in October from 3.8% in September, broadly matching expectations, while core inflation remained unchanged at 2.5%. The figures indicate that higher energy costs remain the principal source of price pressures, with limited evidence of inflation spreading more widely through the economy.
The euro showed little reaction to the release, reflecting a market increasingly focused on geopolitical developments and France's fiscal challenges rather than inflation data alone. Investors currently assign approximately an 88% probability to an ECB rate increase in December, although rising French bond yields may reduce the need for additional monetary tightening.
Signs of stabilisation have emerged, with EUR/CHF attracting buyers around 0.915 as concerns surrounding French public finances have eased somewhat. EUR/USD has also benefited from post-election dollar weakness, but resistance near 1.1250 continues to restrict further gains. A strong US payrolls report could reinforce that ceiling and leave the euro vulnerable heading into next week.
Looking ahead
Bank of England decision: A 25-basis-point increase to 4.00% is widely expected, with the vote split and Bailey's guidance likely to determine sterling's immediate direction.
US nonfarm payrolls: Friday's employment report will be critical for Fed expectations and the dollar's near-term performance.
GBP/USD: The 1.35 level remains a key reference point, with sterling vulnerable to a less hawkish BoE outlook.
EUR/USD: Resistance around 1.1250 remains in focus, particularly if US labour market data surprises to the upside.
Dollar index: The 101 support level will be closely watched as markets reassess the outlook for US interest rates.
Geopolitical developments: Further movements in energy prices and US-Iran relations could influence inflation expectations, risk appetite and currency volatility.