GBP: Sterling Reacts to Softer Inflation

The latest UK inflation figures pushed sterling briefly lower, although losses were quickly contained. Headline CPI eased to 3.6% year-on-year in October, in line with forecasts, while the monthly print held at 0.4%. Core CPI slowed to 0.3% on the month and producer price readings again pointed to muted pipeline pressures.

The pound fell to 1.1336 against the euro and 1.3140 versus the dollar before recovering slightly. Markets now judge the Bank of England to be well placed to deliver a rate cut in December, encouraged by evidence that the UK’s disinflation trend is reasserting itself.

However, services inflation remains stubborn at 4.7%, limiting the Bank’s scope to ease policy. With investors only pricing two further cuts from here, any stabilisation in expectations could offer sterling some respite.

USD: Markets Watch US Tech and Upcoming Data

Global sentiment remains cautious as investors consider the risk of a deeper downturn in US technology shares. High-yield credit has softened and concerns following recent corporate stress events continue to weigh on risk appetite.

Focus now turns to a series of US catalysts. These include FOMC minutes later today, Nvidia’s quarterly earnings, and tomorrow’s release of the delayed September employment report. Divergent views inside the Federal Reserve could support the dollar, while the labour data may represent the best chance for a softer USD tone this week. Unless the figures encourage markets to lean more firmly toward a December rate cut, equity markets may stay on the back foot.

EUR: Volatility Underpriced but EUR Bias Holding

Although realised EUR/USD volatility has slipped below 5%, traded one-month volatility has increased, signalling that investors still expect meaningful movement into year-end. Risk reversals remain tilted in favour of EUR calls and USD puts, showing that positioning for a higher EUR/USD remains intact.

Eurozone releases are sparse, with only the final September inflation figures due and no significant ECB commentary expected. EUR/USD is likely to remain range-bound, but a move below 1.1560 to 1.1565 could prompt some intraday weakness.

Looking ahead

Sterling may stay fragile as the UK Budget approaches and markets refine expectations for the Bank of England’s December decision. The dollar’s direction over the coming sessions will hinge on Fed communications and incoming data. The euro retains a constructive tone, though further gains depend on softer US indicators and confirmation of a December Federal Reserve cut.