GBP: Sterling remains on the back foot
Pound sterling continues to face pressure against the euro, with GBP/EUR expected to trade below 1.13 in the coming days. Investor sentiment toward the UK remains fragile as uncertainty grows around the contents of next week’s budget. Midweek inflation data is likely to confirm that the disinflation trend is progressing, which could reinforce sterling’s softer tone.
GBP/EUR slipped under 1.13 last week after the government signalled it would no longer push ahead with income tax increases. This raised concerns that the public finances will stay vulnerable. A flurry of leaks, reversals and mixed messages on the budget has called the government’s competence into question and continues to weigh on sterling. Market sensitivity is elevated and a risk premium is likely to persist.
The pair trades around 1.1325 at the start of the week, below its nine-day EMA, which keeps the near-term bias lower. Technical indicators, including the RSI, support the downward momentum. A retest of last week’s 1.1285 low appears feasible. Inflation figures on Wednesday will be closely watched. A print below the 3.6 percent year-on-year consensus could reinforce expectations for another Bank of England cut next month, with February potentially following.
Expectations for further easing have risen as domestic data has softened and the prospect of tax rises in the budget suggests slower growth and lower inflation in 2025. Retail sales arrive on Friday, and although recent readings have surprised positively, any support for sterling has been modest. PMI data later that day will offer a first glimpse of November’s economic performance. Recent surveys have exceeded expectations, hinting at pockets of resilience. Even so, any sterling recovery is likely to be limited and the broader trend of GBP/EUR weakness remains intact.
Uncertainty over the budget continues to cloud the outlook. The 10-year Gilt to Bund spread finished last week at 186 basis points, wider on the view that the government may choose political convenience over fiscal discipline. While EUR/GBP has eased slightly, we doubt the cross needs to sustainably trade below 0.88. A softer October CPI reading would place sterling under renewed pressure.
USD: Dollar steadies ahead of key data
The dollar begins the week on firmer footing after last week’s rapid sell-off proved overextended. Markets now assign roughly a 50 percent chance to a Federal Reserve cut in December, which leaves the currency more evenly balanced heading into upcoming data releases. This week brings a fuller slate of US indicators and the dollar is likely to take direction from these events.
Wednesday’s release of the FOMC minutes is unlikely to trigger a major rally, given that pricing already reflects a more cautious stance. Chair Jerome Powell previously highlighted that another cut in December was far from guaranteed and that views within the Committee were highly divided. Attention will quickly turn to Thursday’s jobs report, with consensus looking for a 50,000 rise in non-farm payrolls and an unchanged unemployment rate of 4.3 percent. Such an outcome would sit slightly in favour of the dollar, since a December cut would require more pronounced weakness.
The week also features several Fed speakers, including Philip Jefferson today. Any repeat of the message that the central bank should avoid rushing further cuts, coupled with uncertainty over the neutral rate, may offer gentle support to the dollar.
EUR: Euro looks to data for direction
The release of Eurozone flash PMIs on Friday is the next meaningful test for the euro. Recent surveys suggest businesses are adapting to the unsettled global backdrop, and Germany’s discussion of measures to secure lower energy costs for industry could provide further encouragement if proposals gain traction.
EUR/USD has slipped back to the 1.1600 area as the stronger dollar reasserts itself. Demand is likely to emerge on dips towards 1.1560 to 1.1580. The calendar is busy with European Central Bank speakers, and markets will focus on Philip Lane’s remarks in Ireland this afternoon. Investors have been reducing expectations for an additional ECB cut, which may help limit euro downside in the short term.
Looking ahead
Sterling remains vulnerable to domestic political uncertainty and incoming inflation data, while the dollar’s next move hinges on this week’s US releases. The euro awaits confirmation that regional activity is stabilising. Overall, FX markets look set for another week driven by policy expectations, data surprises and shifting risk appetite.
