GBP: Pound Finds Technical Lift but Faces Broader Challenges

Sterling is contending with a patchy performance across its major peers. The pound has pushed to its highest level in nearly three weeks against the euro, trading above €1.15 for three consecutive sessions – a move supported by positive technical signals that point to potential further gains towards €1.16. Yet this strength does not extend elsewhere. Beyond an eye-catching 3% advance against the yen this week, sterling has lost ground against most major currencies, including a slip below the $1.34 mark versus the US dollar.

The pound’s rise against the euro owes more to political disorder in France than to any sign of renewed economic vigour in the UK. With President Macron facing limited options and an increasingly fractured government, concerns are mounting that France may remain without an effective administration for some time. This has unsettled investors and pushed up French bond yields, while also nudging UK gilts higher. The move highlights how closely intertwined European debt markets have become. However, rising UK borrowing costs could soon weigh on sterling, especially as the government readies its next fiscal statement. The currency’s relatively high yield advantage over other G7 peers is starting to be seen less as a draw and more as a potential liability should fiscal discipline come into question.

In short, while the pound’s technical recovery against the euro has lent some short-term support, its broader outlook remains constrained by external political shocks, domestic fiscal uncertainty, and an unsettled global risk environment.

USD: Dollar Strengthens Despite Domestic Disruptions

The US dollar has held up well this month, with the Dollar Index rising around 0.7% even as the government shutdown continues. Its two largest counterparts – the euro and the yen – have both weakened due to political and policy turbulence, giving the greenback an additional boost. European instability centred on France, alongside Japanese concerns over a possible delay to monetary tightening following the election of a pro-stimulus prime minister, have both prompted safe-haven flows into the dollar.

Bond markets have mirrored the tension seen in late summer, with long-term yields climbing as investors reassess the global outlook. Despite this volatility, traders appear largely untroubled by the US shutdown itself. Reports suggesting that President Trump may be willing to reopen negotiations with Democrats have added a glimmer of hope that a resolution could soon emerge.

From a policy standpoint, the Federal Reserve’s expected rate cuts for year-end may still prove excessive. Should the Fed minutes later today signal a more cautious approach, the dollar could benefit further as markets scale back expectations for imminent easing.

EUR: Political Strains Keep the Euro on the Back Foot

The euro has struggled to regain its footing as political uncertainty in France continues to cast a shadow. EUR/USD has again drifted towards the $1.1650 support level, repeatedly testing the lower bound of its recent trading range between $1.1650 and $1.1750. With investor sentiment subdued and volatility picking up, any hawkish tilt in forthcoming Fed communications could expose the pair to further declines.

Short-term market positioning reflects this unease. One-week risk reversals have turned negative, signalling greater demand for protection against euro weakness. While longer-term investors remain relatively positive on the single currency, the persistence of long positions may now be amplifying the downward move as confidence erodes. For now, market participants appear to view the French situation as a contained national issue rather than a systemic eurozone risk, which explains the absence of a broader euro sell-off.

Looking Ahead

In the coming weeks, currency markets are likely to remain reactive to political developments and shifting rate expectations. For sterling, further progress against the euro may prove difficult if UK fiscal rhetoric spooks gilt investors. The dollar could extend its gains if the Federal Reserve maintains a firm tone, while the euro’s trajectory will depend heavily on whether French political uncertainty subsides or intensifies. Overall, volatility looks set to stay elevated as markets navigate a delicate balance between local disruptions and global monetary signals.