GBP: Relief rallies likely to be capped
The pound has weakened notably over the past month, driven by a combination of softer UK data, heightened fiscal uncertainty, and a dovish recalibration of interest rate expectations. Markets have increasingly priced in further easing from the Bank of England (BoE) as the prospect of looming tax rises grow. This has eased stress in the UK bond market though, dragging gilt yields lower.
The rationale is clear: anticipated tax hikes and tighter fiscal policy are expected to dampen UK growth over the medium term. That softer growth outlook reduces inflationary pressure, giving the BoE greater scope to ease rates. Markets have already responded by lowering their expectations for the terminal rate – now closer to 3.30%, down from 3.60% just weeks ago. This shift has helped narrow the risk premium on longer-dated gilts, easing the strain that had built up earlier in the year.
Crucially, this repricing has also unlocked additional fiscal breathing room. The decline in gilt yields could provide the Treasury with up to £5 billion in extra flexibility – a meaningful cushion as Chancellor Reeves prepares to tackle a fiscal gap estimated to be at least £25 billion annually.
But declining yields hasn’t helped the pound. The pound’s selloff has already absorbed much of the shift in rate expectations, though, reducing downside risks into Thursday’s BoE meeting. If the BoE opts to hold rates, sterling could benefit from a short-lived relief rally. Importantly, however, a hold this week does not change the broader direction of travel. The Bank is still expected to cut rates before year-end and therefore momentum remains tilted toward further GBP downside, so any gains are likely to be shallow and temporary.
This is especially true given the November 26 Budget presents a key risk event. Talk of significant tax increases is stirring uncertainty – a dynamic sterling historically dislikes. While the formal announcement may lift some of that uncertainty and trigger a GBP rebound as well, the longer-term growth impact of fiscal tightening could weigh on sterling and reinforce the case for further BoE easing.
In short, sterling may find some near-term support after the BoE meeting and Budget this month, but the broader macro and policy backdrop remains challenging. Relief rallies are likely to be capped, and the path into year-end still points toward a cautious, data-dependent BoE and a currency vulnerable to fiscal and growth headwinds.
USD: Demand flickers, supply stalls
Yesterday’s ISM PMIs showed factory activity declined for an eighth consecutive month, with the headline index slipping to 48.7 – signaling continued contraction. Inflationary pressures eased, as the prices paid index fell 3.9 points to 58, its lowest level since the start of the year.
That said, the internals of the report paint a more constructive picture than the headline alone suggests. Measures of demand (e.g., new orders) and employment improved in October, pointing to firmer underlying momentum. The drop in inventories – a drag on the headline index – appears justified and more easily depletable, as supply chain strain from lingering tariffs continues to hinder steady replenishment. In fact, the supplier deliveries index rising to a four-month high points to persistent supply bottlenecks, even as demand conditions improve.
After trimming earlier gains, the dollar regained strength as markets digested the full breadth of the report. Fed Governor Goolsbee’s hawkish remarks added fuel, noting that the bar for a December rate cut is now higher than it was in October.
The dollar has also built strong upside momentum recently, as investors – faced with limited fresh data – have leaned on broader themes to justify improved positioning: trade tensions have eased, AI optimism continues to roar, corporate earnings remain strong, and the Fed retains a hawkish stance despite two rate cuts. Against that backdrop, it would take significantly soft labor data – especially from alternative sources – to derail the dollar’s rebound, which remains underpinned by strong technicals.
EUR: Bystander in the FX crossfire
The euro hit a three-month low against the dollar yesterday. The pair has convincingly broken below short-term moving averages – 21-, 50-, and 100-day – and now trades closest to a still-upward-sloping 200-day moving average. This setup points to pronounced short-term bearish momentum, with long-term bears beginning to gain traction as well. With the relative strength index nearing oversold territory in the 35–40 range, EUR/USD spot may well attract buying interest around the 1.15 support level. That said, stronger-than-expected alternative data out of the US this week could test that threshold.
Meanwhile, against sterling, the euro recently hit fresh highs of 0.8818 – levels not seen since early 2023. These contrasting performances, in fact, are not indicative of broad-based euro strength, but rather highlight its relatively neutral role in the dollar’s H2 recovery attempts, and sterling’s structural weakness.
EUR/GBP continues to flirt with what appears to be increasingly fragile resistance at 0.88, with BoE easing bets and the upcoming UK budget casting persistent doubt over sterling’s outlook. This week’s BoE meeting could well be the catalyst to propel EUR/GBP more sustainably above that level, with dovishness still underpriced by markets, in our view.
Technicals paint bleak picture for GBP
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: November 3-7
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
