USD: Dollar slips as December cut priced in

The November ADP report showed a 32,000 drop in US private payrolls and further moderation in wage growth, the weakest payroll print since early 2023. For a market already leaning heavily towards a December cut, this was treated as the missing confirmation. The OIS curve now discounts a full 25bp move next week, with only another 15bp priced by March, which tells us investors are looking for a one-off, hawkish cut rather than the start of an aggressive easing cycle.

In our view, the 90% probability attached to a December move still rests on a relatively narrow set of data, with ADP rarely a reliable guide in normal conditions. Even so, with little else on offer, markets have amplified its importance. The dollar index fell about 0.4% yesterday as USD weakness broadened across G10. Part of that move reflects simple mean reversion from stretched, short-term overvaluation, as the index drifts back towards levels implied by rate differentials.

We still expect a decision profile similar to September and October: a cut wrapped in hawkish communication that could ultimately prove dollar supportive. For now, however, heavy Fed pricing, softer data and negative December seasonality leave the near-term risk skew for USD pointing lower. Attention today will fall on Challenger job cuts and weekly claims, while a surprise spike in PCE inflation tomorrow would be needed to materially shift Fed expectations before next Wednesday.

GBP: Sterling rally fuelled by better data and position squeeze

Sterling gained more than 1% against the dollar yesterday, its largest daily rise since April, and briefly approached 1.34 before stalling just below the 100-day average near 1.3370. GBP/USD has pushed through key moving averages and its upper Bollinger Band, signalling strong bullish momentum but also raising the risk of a period of consolidation. GBP/EUR has edged to a one-month high and is flirting with a short-term breakout.

The move has been underpinned by improving UK data and a partial unwind of pre-Budget anxiety. The services PMI was revised up to 51.3 from 50.5, with the composite at 51.2, marking seven consecutive months of expansion in private-sector activity. This has helped reduce the fiscal risk premium that had built into sterling, leaving the currency looking less undervalued versus fundamentals. Options markets, which had positioned defensively into the Budget, are now seeing some of those left-tail risks priced out, easing pressure on implied volatility.

CFTC data show a split in positioning: leveraged funds have rebuilt long exposure after trimming during the summer sell-off, while asset managers remain net short and cautious on the longer-term outlook. Taken together, we see the current move as a counter-trend stabilisation rather than a full re-rating story. Sterling tends to benefit when global risk appetite is firm, given the scale of foreign ownership of UK assets, and the repricing towards more Fed easing in 2026 has clearly helped. We still expect 2026 to be a challenging year for the currency, even if near-term resilience offers tactical opportunities.

EUR: Euro breaks out as rate differentials swing in its favour

The euro has strengthened against the dollar through the week, helped by further confirmation of softer US data and expectations of Fed easing in December. Yesterday’s ADP figures added to the perception of a cooling US labour market, while political noise around a more dovish Fed Chair nomination under Trump has reinforced USD-negative sentiment. In contrast, the euro leg of the pair has been relatively stable, which has helped bring the rate differential story more clearly into focus.

Technically, EUR/USD has punched through resistance levels aligned with the 21, 50 and 100-day moving averages. These averages had capped price action through September and October, reinforcing a bearish structure, but the pair is now trading above the downtrend drawn from mid-September. This break suggests scope for further upside, provided the Fed delivers the dovish narrative markets are searching for.

Fundamentally, the ECB looks set on a steady policy path, which leaves US data as the dominant driver for the cross. Eurozone retail sales are expected to be flat for October after earlier contractions, but are unlikely to shift ECB thinking. We maintain a EUR/USD target of 1.170 into next week’s Fed meeting and 1.180 by year end. Our short-term fair value model still implies roughly 1.1% undervaluation, and any progress towards a Russia-Ukraine truce by Christmas would add an additional tailwind for the single currency.

Looking ahead

With a December Fed cut now heavily priced, the balance of risk for the dollar hinges on how hawkish the accompanying message proves to be and whether incoming activity and inflation data validate expectations for only limited follow-up easing. For EUR/USD, the sustainability of the technical breakout will depend on the Fed reinforcing a dovish tilt rather than pushing back against market pricing. For GBP, the combination of improved domestic data and fading fiscal risk supports further near-term stability, but stretched positioning and still-fragile longer-term fundamentals argue against extrapolating the latest rally too far into 2026.