What happened in October?
The dollar strengthened against both our European currencies in October, while sterling fell against the euro.
Pound edges lower
October was a bumpy month for the pound, which slid from a high of 1.348 on 3 October to a low of 1.314 on the last day of the month. The dollar’s rally and worries about the underlying state of the UK economy weighed on sterling.
Dollar outmuscles euro
The euro also slid against the strengthening dollar, with a high of 1.170 on 3 October falling to a low of 1.148 on 31 October. The dollar was buoyed later in the month by a US-China trade truce and indicators of a resilient economy. Nevertheless, the euro remains over 5% up over the past year.
Euro climbs as pound stalls
Among the European currencies, the euro strengthened at the expense of sterling. The pound lurched from a high of 1.152 on 13 October to a low of 1.135 on 30 October as traders started to worry about the impact of the UK Autumn budget.
Dollar index tracks upwards
The dollar index, which tracks the dollar against a basket of major currencies, strengthened throughout the month. A low of 98.059 on 17 October was quickly wiped out by impressive gains, with the greenback leaping to 98.817 on the last day of the month.
What’s in store for November?
Sterling
Sterling’s short-term fate is in Chancellor Rachel Reeves’ hands as she prepares for the 26 November budget, which will outline the Government’s tax, spending and borrowing plans for the year ahead. Fears of tax rises in the announcement have already seen the pound slide against other major currencies, and the budget has the potential to spook markets further. Reeves faces a difficult balancing act as she attempts to bring in much-needed revenue without undermining economic growth. Expect some money market volatility following the Chancellor’s statement.
Investors are also concerned about the underlying strength of the UK economy after a spate of weak economic data. The good news is that the UK’s stubbornly high inflation appears to be softening, which may persuade the Bank of England to cut interest rates again sooner.
Euro
The EU economy was buoyed by positive news on inflation, manufacturing activity and GDP growth at the end of October, and November may see more of the same. Unlike the UK and US, EU inflation appears to be firmly under control and now sits just above the European Central Bank’s 2% target. With that in mind, investors will not be expecting another interest rate cut this year.
US dollar
The Federal Reserve (Fed) cut interest rates for the second straight meeting at the end of October, lowering its benchmark overnight borrowing rate to a range of 3.75%-4%. This was expected, but more of a surprise were comments from Chairman Jerome Powell suggesting a further cut might not be on the cards this year. While it is one factor among many, money market traders tend to favour higher interest rates because they promise greater returns. Powell’s comments buoyed the dollar at the start of November.
Investors will be looking for further hints about the Fed’s next course of action as the month progresses. Suggestions of a cut could lead to a dollar sell-off, but for the moment the greenback looks to have wind in its sails through the rest of the year.
Of course, one factor that could upset that projection is President Trump’s unpredictable tariff policy. The truce agreed with China in late October boosted markets, but the next trade crisis could be just around the corner. Watch this space.
The takeaway?
The pound struggled through October, and November could see more of the same, especially if markets react badly to the 26 November budget. It’s likely to be steady as she goes for the euro but the dollar index could be impacted by interest rate speculation as traders try to second guess the Fed’s next move.
