GBP: Fiscal Concerns Weigh on Sterling

The pound remains under sustained pressure, trading near multi-month lows against both the euro and the dollar as investors anticipate a significant fiscal tightening in next week’s Budget. Chancellor Rachel Reeves has strongly indicated that income taxes will rise, leading markets to price in a faster pace of monetary easing by the Bank of England.

UK gilt yields have fallen further, pulling sterling lower. GBP/EUR dropped 0.6% on Tuesday to reach a two-and-a-half-year low of 1.1336, while GBP/USD declined nearly 1% and now trades close to 1.3030. Market pricing suggests an increasing likelihood of a rate cut before year-end, possibly in December if the Bank opts to wait for fiscal clarity this week.

Short-term yields in the UK have fallen more sharply than in the US or the eurozone, underscoring expectations that the BoE may move first. Although this easing in yields provides the Chancellor with a more stable backdrop for her Budget, foreign exchange markets remain concerned that higher taxes could further restrain domestic demand and economic growth.

USD: Dollar Benefits from Risk Aversion

The US dollar continues to strengthen as the government shutdown extends into its 36th day, the longest in history. The lack of new economic data has clouded the Federal Reserve’s policy outlook and increased volatility across asset classes.

The dollar is trading at its strongest level since May and has gained more than 1% against all G10 peers this quarter. This reflects renewed demand for safe-haven assets as equity and cryptocurrency markets retreat. Treasury yields have stabilised on strong demand, reinforcing the dollar’s defensive appeal.

Bitcoin has now fallen more than 20% from recent highs, entering bear market territory, while global equities are showing signs of fatigue following months of gains. With rate differentials again favouring the dollar and little fresh data to challenge its position, the greenback remains the anchor for global portfolios.

EUR: Struggling for Direction

The euro remains weak, having slipped below 1.15 against the dollar for the first time since August. Valuation models suggest the pair should be closer to 1.17, but without supportive data or a clear shift in sentiment, buying interest remains limited.

European bond yields have fallen but not to the same extent as UK gilts, leaving the single currency relatively steady against the pound yet vulnerable to the stronger dollar. The break below the 100-day moving average leaves 1.14 as the next key support, and market sentiment indicates that sellers may continue to test lower levels.

In the absence of meaningful US data, the euro’s trajectory will likely continue to depend on global risk appetite rather than domestic fundamentals.

Looking Ahead: Focus Turns to the BoE and the Budget

Sterling is likely to stay under pressure ahead of Thursday’s Bank of England meeting and the forthcoming Budget. The dollar is expected to retain its safe-haven advantage while the shutdown continues, and the euro’s performance will depend largely on shifts in broader market sentiment.

If fiscal tightening is paired with a dovish signal from the BoE, sterling could remain heavy through year-end. A more balanced approach between fiscal caution and monetary patience could provide temporary stability, although persistent growth risks suggest any rebound is likely to be limited.