USD: Softer data and policy uncertainty weigh on the dollar

US equities broke a five-session advance at the start of the week as caution set in. Signals from the Bank of Japan that it may lift rates prompted investors to reassess carry trades funded in Japanese yen. Global bonds lost ground, yields moved higher, and defensive positioning became more visible across markets. Precious metals found support, crypto stayed choppy, and the dollar slipped following a weak US PMI release. The softest moves came against the yen, highlighting how expectations around BoJ policy are reshaping FX flows.

Political noise added another layer of uncertainty. The probability of Kevin Hassett becoming the next Federal Reserve chair climbed sharply, and markets regard him as more dovish and aligned with the White House preference for easier policy. Concerns about Fed independence and signalling affected risk appetite, and higher Japanese yields likely tempered what might otherwise have been a stronger rally in US Treasuries.

Macro releases reinforced a cautious tone. The ISM Manufacturing PMI fell to a four-month low, with employment weakening and input prices rising. This blend of labour softness and persistent inflation complicates the Fed’s next steps. With the official US jobs report pushed until after December’s meeting, investors will give private labour surveys and PCE data this week greater importance. Markets still price roughly 60 basis points of Fed easing by June 2026, although confirmation of a dovish chair and softer data could alter that path.

GBP: Political risk and BoE expectations cap sterling upside

Sterling remains heavily discounted against the euro when measured against relative real rates, with a persistent UK risk premium acting as a drag. Fiscal credibility is yet to be fully restored and political uncertainty continues to weigh. The Bank of England is expected to cut rates at least twice next year, with debate over a possible third. This is not a backdrop that favours a sustained sterling recovery.

GBP/EUR upside is still restricted by the 50-day moving average near €1.1428, a barrier that has capped rallies since mid-June. The pound remains roughly six percent weaker against the euro year-to-date and offers little sign of a sharp turnaround. Even if a rebound emerges, it is likely to be gradual.

Volatility continues to shrink. Monthly trading ranges have trended lower for years, reflecting a shift from event-driven swings to broader macro-driven stability. With 2025 ranges sitting below the long-term average, stronger catalysts will be required to break the pair out of its tight structure.

Losses in sterling accelerated during the summer as markets positioned for a difficult UK budget. Concerns were high that political pressures on the government might lead to a package that failed to address the rising deficit. The eventual £26bn in tax rises restored around £22bn in fiscal headroom, offering reassurance to investors if not to households. The market now anticipates a terminal Bank Rate near 3.5 percent and is fully priced for a cut in December, with another expected by April 2026. Strategists see EUR/GBP moving closer to the rate-implied level near 0.86, equivalent to 1.1630 in GBP/EUR terms.

Further ahead, the local elections in May 2026 represent a key political marker. A large setback for the governing party could intensify leadership pressure, creating a potential headwind for sterling as markets assess policy risks.

EUR: Euro finds support in relative policy calm

EUR/USD reached a two-week high at 1.1652 before meeting resistance around 1.1650. The pair eventually settled below the 50-day moving average near 1.1620, keeping it within its broader bearish framework. The 50-day average has been a reliable cap since mid-October.

The euro was broadly firm as the stability of ECB policy looked appealing compared with the shifting outlook for the US and UK. It weakened only against the yen after BoJ Governor Ueda signalled the likelihood of a rate hike this month. As global bonds sold off, euro-area debt benefited from relative stability and spillover demand. Additional momentum in EUR/USD came from the softer US ISM manufacturing print and the prospect of a dovish new Fed chair, reinforcing expectations for easing next week and beyond.

Eurozone CPI is released today and is expected to post a steady reading just above target at 2.1 percent. Only a notable downside surprise, well below 2 percent, would be likely to trigger meaningful price action. The region’s unemployment rate is also worth monitoring, although it is not expected to move markets significantly.

Looking ahead

The final stretch of US data before the December Fed meeting will be decisive for near-term dollar direction, especially if labour indicators come in weaker. Japanese policy developments remain a major driver for global risk sentiment and FX flows. In Europe and the UK, political dynamics and central bank communication will guide investor positioning into year-end.