GBP: Sterling supported by fiscal breathing room

Sterling rose after the Budget, helped by greater fiscal headroom and the government’s choice to avoid the heavier tax increases expected for next year. The OBR now places the fiscal gap at roughly £6bn, reducing immediate pressure for sharper tightening.

Concerns over the credibility of tax measures pushed into later years remain, and the spending profile running towards the 2029 election still appears uncertain. Even so, we do not see room for a sustained sterling rally. The Budget offers limited implications for the BoE cycle, though lower energy costs may give policymakers slightly more confidence to begin easing.

With sterling no longer cheap on a trade-weighted basis, we expect three BoE cuts over the next seven months to lift EUR/GBP modestly. We look for demand around 0.8700 to 0.8750 and a move back towards 0.8850 (1.1299) ahead of a likely 18 December rate cut.

A key feature of the Budget is its reliance on delayed implementation. Deferring measures weakens the clarity markets look for. Bringing more adjustment forward into 2026 would have enhanced credibility, reduced the risk of policy reversals and accelerated revenue collection.

The sheer number of initiatives adds another layer of uncertainty. Roughly 88 separate measures were unveiled, far above the long-run average, raising doubts about the reliability of the projected £26bn in extra tax revenue. Market reaction, however, was calm: sterling firmed and gilt yields fell, helped by the pre-release of larger fiscal headroom.

The OBR’s inflation outlook offers little near-term comfort, with higher forecasts for both 2025 and 2026. Markets have barely shifted their expectations and still assign a high probability to a December BoE cut. The current calm is likely to fade, with pressure set to re-emerge at the long end of the curve and sterling likely to soften as details are digested.

USD: Dollar stabilises after dovish repricing

The dollar’s decline this week reflects alignment towards lower policy rates after the dovish swing in Fed expectations rather than any geopolitical shift in safe-haven preference. The yen’s outperformance relative to higher-beta currencies such as SEK illustrates this well.

With US markets closed for Thanksgiving, liquidity is thin, creating a theoretical window for possible Japanese intervention in USD/JPY. Authorities may still prefer to act following a dollar-negative data release, and the recent pause in the pair reduces any urgency to respond.

The dollar remains somewhat expensive versus G10 peers, but the scale of this week’s move and limited scope for further dovish repricing keep us neutral through the holiday. Signs of softness in the US economy allow officials to look past persistent inflation, with markets almost fully pricing a December cut alongside at least two more next year. The possibility of Kevin Hassett becoming the next Fed chair reinforces expectations of a more assertive easing cycle and has already contributed to lower Treasury yields.

The Beige Book offered little fresh insight. It failed to push the dollar index through support at 99.400, leaving an increasingly fragile but intact uptrend in place. Despite valuation concerns, near-term catalysts for renewed downside remain limited until more data arrives.

EUR: Euro steady with scope for further gains

The euro still has room to edge higher, particularly if progress continues in negotiations on a Ukraine peace deal. Talks may extend into next week, but recent signals have been constructive enough to keep EUR/USD supported. With 1.16 regained, 1.17 appears reachable, and our 1.18 year-end target remains plausible as undervaluation narrows and seasonal effects turn positive.

The ECB minutes due today are unlikely to move markets, given the consistent communication of a neutral stance. Falling oil and gas prices continue to lift Europe’s terms of trade, offering a steady support for the euro as a net-energy importer. Still, idiosyncratic positive news from the EU periphery can weigh on EUR/USD via cross flows, while the Swiss franc may be the main casualty of improved regional risk sentiment.

Sentiment indicators from Europe are due, though the real question is whether survey improvements translate into firmer hard data. Inflation figures from France and Germany on Friday will be key in assessing whether price pressures are stabilising near target. Softer outcomes may revive ECB easing speculation and put some downward pressure on the euro.

Looking ahead

US developments will continue to drive the broader FX picture. Softer US data and a more dovish Fed path offer the euro the strongest opportunity to finish the year higher. Sterling looks vulnerable as markets work through the longer-term implications of the Budget, while the dollar enters the holiday period with stretched valuations and limited catalysts for renewed strength.