Sterling climbed to its strongest level against the euro in around 19 months last week, helped by a calm reaction to the UK Budget and by uncertainty at the ECB after President Christine Lagarde announced she will leave in February. The Fed and ECB both held rates, and the dollar eased after Fed Chair Kevin Warsh gave no steer on December.
This week brings the Bank of England decision on Thursday, the US midterm elections on Tuesday and the US jobs report on Friday, with eurozone flash inflation on Wednesday.
A calm Budget keeps sterling firm, with a Bank of England rise expected
Chancellor John Healey’s first Budget passed without drama. It left £15 billion of fiscal headroom, down from £24 billion in March, and the OBR raised its 2026 growth forecast to 1.2% while cutting 2027 to 1.0% from 1.6%, citing the drag from high energy prices. It also projected Bank Rate rising to around 4.25% by mid-2027. Gilt yields edged lower and sterling was little changed against the dollar, a reaction analysts read as the Budget doing its job, although the thin buffer leaves gilts exposed to weaker growth or higher global borrowing costs. The Bank of England decides on Thursday, with markets widely expecting a quarter-point rise to 4.00% after September’s 6 to 3 vote to hold.
ECB holds as Lagarde announces her exit, leaving the euro on the back foot
The ECB left its deposit rate at 2.50% on Thursday, as expected, in a unanimous decision that followed discussion of another hike, warning that energy prices pose upside risks to inflation and downside risks to growth. The bigger news was Lagarde’s decision to leave in February, adding uncertainty with euro area inflation at 3.8% and French bond yields still under pressure. Markets continue to price a high probability of a December hike. Third-quarter growth surprised at 0.4%, though France contracted by 0.1% and Germany grew just 0.2%. The euro eased after the decision, and Wednesday’s flash October inflation estimate, forecast at 3.9%, is the next test.
Fed holds in a split vote and leaves December open
The Federal Reserve held at 3.75% to 4.00% in a 10 to 2 vote, with Cook and Hammack dissenting in favour of a hike, and Warsh offered no guidance on December, which left the dollar softer after the press conference. Data supports the hawks: US growth ran at 3.4% annualised in the third quarter, and September PCE inflation was 3.6%, with the core measure at 3.1%. Markets still price a high probability of a December increase. The US midterm elections on Tuesday and Friday’s jobs report, forecast at around 55,000 to 65,000 after 29,000 in September, are the next tests for the dollar.
The week ahead:
- US midterm elections – 03/11 – GBPUSD, EURUSD
- Eurozone flash inflation (October) – 04/11 – GBPEUR, EURUSD
- US ISM services PMI (October) – 04/11 – GBPUSD, EURUSD
- BoE rate decision – 05/11 – GBPUSD, GBPEUR
- US jobs report (October) – 06/11 – GBPUSD, EURUSD
With a Bank of England decision, a US election and key jobs data all due this week, it is worth speaking with your currency specialist about how the outcomes could affect any transfers you have planned in the coming weeks.
