Sterling ended last week close to its strongest level against the euro in 16 months, helped by hotter-than-expected UK inflation and a jump in UK business surveys, while the euro was held back by French political stress and a slowdown in eurozone activity.
Several major central banks decide this week, including the Fed on Wednesday and the ECB on Thursday, alongside the UK Budget on Wednesday. The Bank of England follows on 5 November.
UK inflation and strong business surveys keep sterling firm against the euro
UK inflation rose to 3.5% in September, up from 3.1% and above the 3.4% expected, with motor fuel prices up 29.8% on the year and services inflation rising to 3.7%. UK flash PMI surveys then beat expectations on Friday: the composite index rose to 53.1, its highest since February, with new orders growing at the fastest pace in 25 months and employment rising for the first time in over a year. The eurozone composite, by contrast, slipped to a four-month low of 51.9. Markets price a very high probability of a Bank of England rise to 4.00% on 5 November, with most traders also pricing another in December. That combination kept sterling near its strongest levels against the euro, while its gains against the dollar were partly retraced.
Fed and ECB expected to hold, with guidance in focus
The Federal Reserve is widely expected to hold at 3.75% to 4.00% on Wednesday, with futures pricing only a small chance of a hike this week but a high probability of one in December. Fed Chair Kevin Warsh’s press conference could matter more than the decision, given his reluctance to pre-commit to a path. The ECB decides on Thursday and is expected to hold its deposit rate at 2.50%, with markets pricing roughly a 75% chance of a hike in December. Thursday also brings the first estimate of US third-quarter GDP and September PCE inflation, the Fed’s preferred measure, followed by eurozone GDP and October flash inflation on Friday.
UK Budget and French politics test sterling and the euro
The Chancellor’s first Budget on Wednesday arrives with gilt yields elevated and has been widely previewed as an attempt to avoid surprises, with investors looking for credible fiscal tightening alongside updated OBR forecasts. For the euro, Moody’s kept France at Aa3 with a negative outlook on Friday, easing immediate pressure after a week of unrest, but its view assumes a deficit-reducing 2027 budget is eventually passed. The lower house begins budget debates this week after rejecting part of the social security bill, and next year’s presidential election keeps French borrowing costs and the euro exposed to political headlines.
The week ahead:
- Fed rate decision and Warsh press conference – 28/10 – GBPUSD, EURUSD
- UK Autumn Budget – 28/10 – GBPUSD, GBPEUR
- ECB rate decision – 29/10 – GBPEUR, EURUSD
- US Q3 GDP and PCE inflation – 29/10 – GBPUSD, EURUSD
- Eurozone Q3 GDP and flash inflation (October) – 30/10 – GBPEUR, EURUSD
With UK inflation, French politics and a crowded run of central bank decisions ahead, it is worth speaking with your currency specialist about how these developments could affect any transfers you have planned in the coming weeks.
