GBP: UK data soft, sterling holds a bid
UK growth momentum has faded, but sterling has remained supported and retains a constructive near-term tone versus the main crosses.
The ONS reported Q3 GDP up 0.1% q/q, in line with expectations, but slower than Q2’s 0.2% pace (revised down from 0.3%). October GDP was subsequently reported at -0.1% m/m. This is a marked downshift from Q1’s 0.7% q/q expansion, which was flattered by public spending.
Even so, GBP has defended post-BoE gains and has formed modest short-term uptrends against both EUR and USD, a setup that can persist into early 2026 as liquidity and headlines thin over Christmas. GBP/EUR has climbed to 1.1433 from 1.1285 in mid-November. GBP/USD is back near 1.34 after troughing at 1.3311 last week and 1.3010 in mid-November. The mid-November lows are consistent with a pre-Budget repricing, with the rebound reflecting post-event relief.
The BoE cut was well flagged and the guidance did not pre-commit to a clear run of further reductions, allowing sterling to stabilise. However, GBP/EUR remains the more vulnerable expression of the UK story. If growth stays sluggish and inflation moves closer to target in early 2026, expectations for additional BoE easing are likely to build, leaving GBP increasingly exposed. Last week’s close MPC vote delivered a brief relief rally, but the underlying macro mix still looks fragile heading into the new year.
EUR: Gradual upside bias, but positioning a risk
The euro printed its strongest levels since late September last week, briefly lifting above 1.18 versus the dollar, before slipping back towards the lower end of recent ranges.
The ECB meeting did little to shift market pricing, but the updated forecasts still allow for a slow grind higher, with rate differentials broadly supportive. A move back above 1.18 before year-end remains plausible. The key caution is positioning, with net long EUR exposure elevated since spring, leaving the currency vulnerable to a sharper pullback if sentiment turns.
USD: Resilient tone despite dovish data flow
The dollar has been steadier than the data would suggest, even as recent US releases have reinforced the cooling narrative.
Payrolls showed a 64k gain in November, modestly above expectations, but sizeable downward revisions to October dragged the three-month average to roughly 22k. November CPI was notably soft, yet markets appeared reluctant to chase the print, helping keep the dollar and front-end rates contained.
Fed easing expectations for 2026 remain intact, with markets pricing around a 25bp cut by April and another by September. The dollar index is up on the week, but still down roughly 0.8% month to date and is tracking its weakest year in over two decades. The bearish USD framework remains centred on an easier Fed next year, but it still needs validation from incoming labour market data, where any renewed strength could challenge the implied easing path.
Looking ahead
With holiday liquidity and a lighter data calendar, positioning and technicals should dominate near-term price action. GBP may stay supported versus USD if broader dollar softness persists, but GBP/EUR looks more sensitive to UK growth surprises and shifting BoE pricing. For EUR/USD, the balance is a gentle upside drift versus the risk of a positioning-driven correction if risk sentiment deteriorates.
