GBP: Sterling steady but seeking direction

The British pound remains sluggish, trading below its 21-day moving average against both the euro and the US dollar. This pattern suggests that near-term momentum has faded, with traders reassessing the UK’s outlook in light of fiscal questions and diverging central-bank policies. Unless data or policy commentary shifts sentiment, sterling may continue to drift without clear direction in the short term.

Taking a longer-term view, the technical backdrop for GBP/USD looks intriguing. The pair has held above its 100-month moving average for two consecutive months — a feat not seen since before the global financial crisis. Even more striking is that the 21-month average has now crossed above the 100-month for the first time since 2003. Historically, that crossover preceded another year of strong gains of around 7 per cent.

Whether the pattern repeats is harder to say. In the early 2000s, the UK economy enjoyed stronger growth, higher yields and a broadly supportive policy mix. Today’s growth backdrop is far weaker, but short-term UK rates remain relatively attractive compared with other major economies. Combined with a more dovish Federal Reserve, that could provide a tailwind for sterling if the Bank of England holds its hawkish stance and maintains credibility.

That remains a significant “if.” Should inflation ease more quickly or the labour market lose momentum, traders could start pricing in additional Bank of England rate cuts — quickly reversing the current narrative. Meanwhile, with US growth showing renewed strength and much of the expected Fed easing already factored in, the dollar could regain momentum. On its own, that might not push GBP/USD below $1.30, but when combined with fiscal uncertainty and potential stress in gilt markets, a slide back into the $1.20s cannot be ruled out.

USD: Yen climbs as trade discussions weigh on the dollar

The US dollar index is hovering close to its 21-day moving average, and a clean break below could signal an extended phase of weakness. The latest drag on the greenback stems from recent US-Japan discussions on trade and exchange-rate policy. While the tone on trade appeared upbeat, currency traders interpreted the remarks as confirmation that the US administration would prefer a softer dollar.

President Trump adopted a conciliatory tone during his meeting with Japanese Prime Minister Sanae Takaichi, and the yen led all G10 gainers as a result. The outcome, coupled with signals from Tokyo that authorities are monitoring the impact of currency weakness, helped reinforce confidence in the yen. Separately, Treasury Secretary Scott Bessent met with Japan’s Finance Minister Katayama to discuss exchange rates — a meeting that underscored both nations’ discomfort with further yen depreciation while hinting that Washington remains open to a weaker dollar overall.

Market sentiment remains broadly positive following constructive trade talks and softer US inflation data. September’s CPI report showed housing inflation easing, with owners’ equivalent rent rising just 0.1 per cent, its slowest pace since 2020. That provides the Fed with additional room to ease and strengthens expectations for a rate cut this week.

Even so, the currency market has stayed remarkably calm. The dollar index has traded within one standard deviation of its three-month average nearly 80 per cent of the time, reflecting low volatility. Despite two rate cuts being priced in, the dollar has held firm, suggesting a more significant decline would likely require a clear deterioration in labour-market conditions — something not yet visible in the data. For now, attention turns to how the Fed manages policy using increasingly delayed indicators, with today’s consumer-confidence and expectations data providing a more immediate reading of household sentiment.

EUR: Euro steady but lacking conviction

The euro has gained roughly 0.7 per cent so far this month against the US dollar, though the move owes more to a lack of fresh direction than genuine enthusiasm. The factors that lifted the euro earlier in the year — weaker US data and dovish Fed expectations — have largely stalled, and with the US government still in partial shutdown, momentum remains subdued. Improved risk sentiment around trade has prevented EUR/USD from falling below $1.16, but upward traction is clearly limited.

In Europe, Germany’s Ifo business climate index climbed to 88.4 in October, driven by stronger expectations that are now at their highest level since mid-2022. However, the current-conditions component fell for a third straight month, underlining ongoing economic fragility. Optimism that followed Germany’s fiscal support measures earlier this year has faded as global headwinds — including US tariffs and a firmer euro — weigh on sentiment. The release of Q3 GDP figures on Thursday will be key. Following a contraction in the previous quarter, another negative print would confirm a technical recession and test the euro’s resilience.

While the odds of a dovish surprise from the Fed on Wednesday are slim, such an outcome cannot be ruled out. If policymakers strike a more accommodative tone than markets expect, EUR/USD could climb back above resistance around the upper $1.16s and potentially set the stage for another attempt toward $1.18.