USD: Fed signals soften as markets lean into cuts
A fractured Federal Reserve entered the spotlight ahead of December’s meeting, only for New York Fed President John Williams to steady expectations by stressing cooling inflation and emerging labour-market risks. His remarks gave investors the reassurance they had been seeking and pushed swaps pricing towards an 80% chance of a rate cut, suggesting the “higher for longer” stance is losing credibility.
The shift comes at an opportune moment for a shortened Thanksgiving week. US equities look oversold into the holiday, and with volatility likely to ebb, conditions are set for a broader rebound. Yet the larger question is whether markets are underplaying a different vulnerability. Corporate balance sheets are drawing increasing scrutiny, and debate is building around whether the extraordinary AI investment cycle is drifting into diminishing returns.
Despite ongoing enthusiasm for the “AI as the new Internet” theme, concerns are rising over the scale of capital spending. The latest Bank of America Global Fund Manager Survey suggests investors now fear companies are prioritising expansion over balance-sheet strength. With a half-trillion-dollar gap opening between expected investment and projected earnings, markets must assess whether this spending will deliver the revenue uplift expected by 2030, or whether misallocation risks are building.
GBP: Sterling steadies before a pivotal Budget
Sterling is firm ahead of tomorrow’s Budget, with markets appearing to have settled on a middle ground before what looks set to be an uncomfortable set of tax measures for households and businesses. Around £30bn in targeted tax rises are expected. Sentiment is so weak that the Chancellor may only need to confirm what has already been briefed to avoid a negative reaction. If she succeeds, scope exists for a tactical GBP recovery into year-end.
GBP/USD has slipped roughly 2.5% this quarter, weighed down by renewed dollar strength, softer domestic data and a higher political risk premium. The looming fiscal announcement has pushed options pricing to levels above those seen before last year’s Budget, with overnight volatility now at a six-month high. Implied moves of roughly three-quarters of a percent suggest the pair may continue to hold above 1.30, but conviction will hinge on the Chancellor’s delivery.
Sterling’s next leg will likely depend on whether investors trim the UK’s risk premium. A Budget that raises revenue without triggering political friction could ease some of that pricing, though not fully. Any implications for inflation will also feed into Bank of England expectations, keeping policy dynamics central to GBP pricing into early 2026.
EUR: Geopolitics and energy dynamics keep the euro supported
The euro has held firm across G10 peers as markets react to tentative signs of progress in Ukraine-Russia discussions. Optimism sparked by comments from former President Trump on Geneva-based talks helped buoy the currency, though gains faded once Moscow rejected counterproposals. Further meetings in Abu Dhabi underline the fluid diplomatic backdrop, and Sweden’s SEB believes a credible peace deal could generate meaningful euro upside.
Even limited optimism has been enough to support the euro, helped by improved terms of trade. As a significant net importer of energy, the eurozone benefits from weaker oil prices, with Brent now near 63 dollars a barrel and sharply lower year to date. This cushion has kept the currency resilient despite persistent growth concerns.
Disinflation remains a challenge. Softer energy prices, weaker wage data and fading demand linked to tariffs all contribute to downward pressure on prices. While the ECB maintains its familiar message that conditions are stable, a prolonged period of subdued inflation could revive speculation about further easing. Recent indicators have not helped: Germany’s Ifo expectations index slipped again, and Q3 growth was confirmed at zero.
Political turbulence in France is also drawing attention after the National Assembly rejected key elements of the 2026 budget. For now, though, markets appear more focused on geopolitical developments than domestic headwinds.
Looking ahead
Markets approach the final days of November with shifting Fed expectations, heightened geopolitical noise and a UK fiscal event poised to set the tone for sterling. With liquidity thinning into the US holiday and volatility likely to ease, price action may consolidate near term. Beyond that, the path of US policy, Europe’s energy-linked disinflation and the UK’s fiscal credibility will remain the dominant themes.
