GBP: Easing expectations rising, though not fully reflected in pricing

Only a small portion of a quarter-point cut is reflected in current market pricing, yet today’s Bank of England meeting could revive dovish sentiment. A softening labour market, combined with September’s weaker inflation data, has given policymakers more room to manoeuvre. Reassuring signals from the Chancellor together with reports pointing towards tighter fiscal plans have helped ease pressure at the longer end of the gilt curve, creating conditions that could justify more easing than investors presently expect.

The more hawkish voices on the Committee may prefer to wait until the full Budget picture becomes clear before adjusting their preferred rate path, which means they are more likely to favour a December cut. By that point, markets are already pricing in sixteen basis points of easing.

For sterling, any further decline today would hinge on how directly Governor Bailey and his colleagues link the policy outlook to the recent fall in inflation. Labour-market softness is already well understood in the market, so fresh commentary on inflation cooling would carry greater weight. Policymakers have yet to settle on a shared interpretation of September’s low reading, which leaves room for a more directional policy message to emerge.

GBP/USD, having previously held above 1.3020, is now at risk of slipping through that threshold and even falling below 1.30. The pair has reached a seven-month low and the price action has clearly adopted a more negative tone as the November Budget approaches.

Technically, sterling remains oversold with the Relative Strength Index stuck below 30. Even so, if the Bank of England adopts a more dovish stance today, that could justify further weakness, keeping momentum stretched and positioning unbalanced.

EUR: Pressure eases, though conviction remains thin

The euro finally broke its five-day losing streak against the dollar yesterday, managing to hover around the 1.15 level as global risk sentiment showed tentative signs of stabilising. This modest improvement followed a period of heightened risk aversion that had revived demand for the dollar’s safe-haven qualities.

Domestic data offered a small lift. Revised euro area PMI figures exceeded expectations, rising above the flash estimate of 52.2 as well as September’s 51.2 reading. This represents the strongest pace of expansion since May 2023 and signals a meaningful improvement from the subdued momentum that defined much of this year. Services saw the sharpest gains, while manufacturing only eked out marginal improvement. The rebound was driven by stronger demand, with new business inflows rising at their fastest rate in two and a half years.

Industrial production added another bright spot this morning, climbing by 1.3 per cent month-on-month in September and partially reversing the steep fall recorded in August. Even so, the recovery is likely to be slow and heavily influenced by base effects rather than a sustained shift in underlying conditions. In essence, this is a cyclical bounce rather than the start of a new trend.

With US data releases limited by the ongoing government shutdown, the euro lacks the softer US macro signals that have often been its strongest tailwind. Without fresh reasons for investors to sell the dollar, EUR/USD remains exposed to more downward pressure, even though it trades roughly two cents below our fair-value estimate.

USD: Softer jobs, firmer services and a dollar that stays supported

The latest ADP release suggests the US labour market is stabilising after two months of weakening, although the details still point to uneven demand. Private payrolls rose by 42,000, reversing the previous month’s drop, yet all of the gains came from large companies. Employment at small businesses fell for the fifth time in six months, showing that while major firms may be adding selectively, the broader base of the economy remains cautious. High-profile layoffs at Amazon, Starbucks and Target have added to concerns about labour-market resilience.

The headline increase needs to be viewed through the lens of structural changes in the labour market. Research from the Dallas Federal Reserve shows that the “break-even” pace of job growth — the level needed to keep unemployment stable — has collapsed from around 250,000 in 2023 to roughly 30,000 by mid-2025. The shift reflects changes in immigration and participation trends. Against that backdrop, a 42,000 gain is not a sign of weakness but one of balance.

Alongside the labour data, the ISM Services Index showed a strong rebound, expanding at its fastest pace in eight months. New orders jumped to 56.2, business activity rose to 54.3 and the combination signalled firm demand from both consumers and businesses. With services making up the largest share of the US economy, recession risks appear less immediate than payroll figures alone might imply.

There is, however, an inflationary sting. The Prices Paid component rose to a three-year high of 70, underlining persistent inflation pressures within services. The employment component climbed to a five-month high, although it remained in contraction territory. Together, these data points suggest the case for another rate cut this year is weakening. As a result, the dollar remains well supported, trading at its strongest level since late May and challenging key resistance near its 200-day moving average.

Beyond the economic releases, investors are watching the US Supreme Court hearings on the legality of certain administration-imposed tariffs, a development that could influence trade policy and risk sentiment.

As noted earlier this week, the data calendar may not offer enough to force a decisive break higher for the dollar, and bullish traders may need to remain patient. A sustained move above the 200-day moving average will likely need a stronger catalyst. With the government shutdown now the longest on record, the interplay between fiscal uncertainty, trade policy developments and future Federal Reserve expectations will continue to guide the dollar’s near-term trajectory.