GBP: Sterling Faces Renewed Weakness Against the Euro

The pound appears vulnerable to further losses against the euro in the coming days. The early October rally in the GBP/EUR exchange rate offered a brief spark of optimism, suggesting a firmer start to the new month. However, that momentum quickly dissipated, giving way to a series of daily declines that reaffirm the strategy of selling into strength.

Market volatility expectations remain elevated, hinting that larger swings could lie ahead. Traders have been actively seeking downside protection on GBP/EUR, a clear signal that sentiment is turning cautious. The underlying concern is that when volatility rises, the pound is more likely to fall than rise.

The UK’s fiscal outlook continues to cast a shadow over the currency. The Office for Budget Responsibility (OBR) has initiated its budget forecasting process, warning of weaker productivity, higher spending, and rising debt costs. This points to possible tax increases and lingering uncertainty for households and businesses. Investors are questioning whether the government can demonstrate fiscal credibility while inflation remains the highest in the G7. With the Bank of England still signalling potential rate cuts, authorities are doing little to defend the pound from long-term depreciation.

USD: Dollar Finds Support as Data Weakens but Fed Stays Guarded

Recent US data offered mixed signals. The ISM manufacturing index showed a seventh straight month of contraction, while services activity stagnated at 50. Inflation pressures were uneven, with service-sector prices rising sharply even as manufacturing costs eased. Labour market indicators remained lacklustre, suggesting a cooling but not collapsing economy.

Despite this patchy data, the dollar has held firm. Investors appear reluctant to take strong directional bets until they see more conclusive evidence from key releases such as non-farm payrolls and the Federal Reserve’s meeting minutes. Nearly half of the Fed’s policymakers see little or no further easing this year, keeping the dollar underpinned in the near term. Should this week’s data hint at improving growth or employment, the greenback could extend its recovery through October.

EUR: Euro Struggles to Build Momentum Against the Dollar

The euro’s attempt to break above 1.1750 against the dollar last week once again failed, even after softer US data. Although President Lagarde reaffirmed confidence in the ECB’s current policy stance, her remarks did little to inspire meaningful gains. The euro continues to trade within a narrow and directionless band, lacking a decisive catalyst.

Upcoming data – including German industrial production, factory orders, and eurozone retail sales – will be key in assessing the region’s health. So far, figures continue to suggest flatlining momentum. Unless data surprises sharply to the downside, the ECB’s recent hawkish tone is likely to keep expectations of rate cuts at bay. Still, bearish pressure could intensify ahead of the release of the FOMC minutes later this week.

Looking Ahead

Sterling remains on the defensive across major pairs, weighed down by fiscal doubts and a dovish Bank of England. The US dollar, by contrast, benefits from its relative stability and the Fed’s cautious stance, while the euro lacks direction amid weak growth signals. With volatility expected to rise around the UK Budget and key US data releases, the coming weeks could prove pivotal in setting the tone for the final quarter of the year.