USD: Strength in Stability

Recent earnings from leading U.S. banks have painted a confident picture of the financial landscape, showcasing solid gains across both commercial and investment banking divisions. Morgan Stanley’s 80% rise in equity underwriting revenue and Goldman Sachs’ record results in markets and investment banking highlight the sector’s continued momentum.

Perhaps more significant than revenue growth was the clear improvement in credit quality. Several institutions scaled back provisions for potential losses, indicating assurance in both consumer and business balance sheets. Citi’s delinquency rates improved year-on-year, JPMorgan reduced its credit card charge-off ratio, and Bank of America, PNC, and Wells Fargo all reported healthier credit metrics. Collectively, this supports the view that U.S. households remain financially sound.

Senior executives echoed this optimism, citing stable credit performance and strong consumer resilience. Yet, some caution persists. JPMorgan’s CEO, Jamie Dimon, warned that the recent collapses of smaller lenders such as Tricolor and First Bank could hint at localised fragility. Even so, the data from the major banks suggests systemic stability remains intact.

Geopolitical sentiment also lifted slightly, as President Trump acknowledged that current tariff proposals were “not sustainable,” signalling a potential thaw in U.S.-China trade relations. Ongoing discussions between Secretary Bessent and China’s Vice Premier Lifeng aim to ease tensions, offering further reassurance to global markets.

The Federal Reserve’s policy trajectory remains supportive, with Chair Powell hinting that quantitative tightening could conclude sooner than expected. With strong bank earnings, steady macroeconomic data, and an improving geopolitical tone, the U.S. dollar remains underpinned by robust fundamentals. Markets now turn their attention to this week’s key indicators, particularly CPI on Friday.

GBP: Fiscal Pressures Meet Surprising Resilience

Sterling continues to defy pessimism, holding firm despite deepening fiscal uncertainty ahead of November’s Autumn Budget. The UK government’s borrowing overshoot – £99.8 billion so far this fiscal year, compared with the £92.6 billion forecast – has reignited anxiety around the sustainability of public finances. September’s £20.2 billion borrowing figure, the highest since the pandemic, adds further strain as debt-interest costs climb.

Chancellor Rachel Reeves now faces the challenge of bridging an estimated £35 billion shortfall to maintain her fiscal targets. Market chatter of potential tax increases and welfare reversals has already weighed on sentiment, pushing speculation that GBP/EUR could slip below 1.14 for the first time since early 2023.

Nonetheless, the pound’s recent performance has been quietly impressive. Over the past month, it has appreciated against most major peers, trailing only the U.S. dollar and Swiss franc. While concerns about fiscal credibility remain, the currency’s ability to hold ground suggests much of the negative sentiment may already be priced in.

UK gilt yields have fallen as investors return to government bonds, easing borrowing costs and reducing fears of another “mini-budget”-style episode. This has stabilised sterling’s footing, with the pound-to-euro rate recovering to around 1.15 and the pound-to-dollar rate at 1.3307, still showing a 7% gain year-to-date. If the upcoming budget avoids surprises, sterling could be well-placed for a late-year recovery.

EUR: Fragile Confidence and Stalled Momentum

The euro remains subdued, struggling to gain traction following last week’s downgrade by S&P from AA to A+. This decision revived long-standing concerns about the region’s fiscal stability, limiting the single currency’s ability to rebound. EUR/USD remains below fair value, with attempts to revisit the 1.18 resistance repeatedly faltering.

Muted rate differentials between the U.S. and the eurozone offer little directional drive. Meanwhile, confidence is being further tested by soft economic indicators and cautious remarks from policymakers. Even with Christine Lagarde scheduled to speak later today, few expect new insights beyond reaffirming that the ECB is content with current conditions.

For now, euro upside appears capped, with traders hesitant to commit in either direction until clearer macro signals emerge. The broader tone remains one of stagnation rather than crisis – but momentum is clearly lacking.

Looking Ahead

Global markets are balancing cautious optimism with an acute awareness of fiscal and policy risks. In the U.S., strong earnings and a supportive monetary outlook sustain dollar strength. The UK faces fiscal challenges, yet sterling’s composure hints at underlying confidence. The euro, however, continues to tread water, constrained by growth concerns and fragile sentiment.

As attention shifts to key inflation data and fiscal announcements, the overarching narrative is one of resilience – but also of limits. Each major currency stands steady for now, yet the coming weeks will test whether this equilibrium can endure.