USD

American and European equity indices continue to climb, yet investor behaviour suggests a degree of wariness is creeping in. Traditional safe havens such as gold, US Treasuries and the Japanese yen have been in demand, underlining concerns about political deadlock and its possible knock-on effects. With the official September employment report postponed due to the government shutdown, traders have been relying on alternative data to assess the labour market.

Data pointed to stronger hiring activity, capturing a broader picture across both public and private sectors, whereas the ADP survey delivered a softer reading, partly due to adjustments in methodology. The overall picture remains cloudy: unemployment is inching higher, pay growth is stable, and job creation appears to be stalling. Challenger data showed a sharp fall in job cut announcements, indicating firms are not rushing to shed workers, but new hiring intentions also dipped.

This leaves the jobs market fragile but not collapsing. The real danger is that prolonged political paralysis could eventually translate into more significant layoffs. For now, the absence of a decisive downturn in employment may discourage expectations of aggressive rate cuts from the Federal Reserve, allowing the US dollar to steady in the near term, even if broader market sentiment remains cautious.

GBP

Sterling opened October with gains against most major peers, although it still faltered against the yen. The pound was once more unable to sustain levels above $1.35 against the dollar, and slipped back from €1.15 against the euro, highlighting its vulnerability to shifting market mood.

The UK’s challenge remains the mix of stubborn inflation and slowing growth – a combination that repeatedly undermines sterling’s momentum. Expectations of sticky inflation can offer some short-term support, since they reduce the likelihood of further Bank of England rate cuts. But in a backdrop of weakening activity, investor confidence tends to falter. Recent surveys show that British firms expect prices to rise at the fastest pace since 2023, with inflation expectations climbing for a second consecutive month.

For sterling, this presents a dilemma: persistent inflation may prevent near-term easing from the BoE, supporting rates, but weak growth and fragile fiscal credibility cap upside potential. Economists warn of possible renewed selling pressure on the pound next year, especially if political risks grow. Debate within the Labour Party about shifting leadership and looser fiscal policies has already unsettled some investors, raising questions over how the government will balance spending plans with fiscal rules. While Chancellor Rachel Reeves reaffirmed her commitment to balancing the books by 2029–30, doubts remain over how this will be achieved without additional taxation, likely targeting property, financial services and other sectors rather than wages.

EUR

The euro’s rally at the start of the week has faded, exposing the limited support beneath it. ECB President Christine Lagarde struck a more dovish tone than anticipated, while Fed officials suggested that additional easing in the US might be premature. This divergence pressured EUR/USD, which slipped by more than 0.3% during one session after the Challenger report gave traders something tangible to trade on during the US data blackout.

Technically, the pair continues to hold above $1.17, although repeated failures to break $1.1750 suggest upside momentum is tiring. Daily price charts show longer upper wicks this week, indicating repeated rejection at higher levels. The retreat from resistance reflects the underlying lack of conviction behind the earlier euro rally, which was largely fuelled by concerns over the US shutdown rather than fundamental euro strength.

Looking ahead

Markets remain caught between cautious optimism and persistent unease. Political uncertainty in the United States, sticky inflation in the United Kingdom, and a hesitant European Central Bank all contribute to an unsettled backdrop. While the US dollar may be finding a short-term floor, sterling is constrained by stagflationary pressures, and the euro appears to be running out of momentum after an artificial bounce. The overarching theme remains one of fragile confidence, with policy uncertainty and political risks set to dominate in the weeks ahead.