GBP: Budget jitters send sterling sliding
Sterling came under heavy selling pressure yesterday, falling sharply across the board as markets brace for a potentially bruising UK Budget next month. GBP/EUR has dropped to its lowest level in over two years, GBP/USD to the lowest in a couple of months and GBP/CHF to the lowest on record (excluding the mini-Budget flash crash of 2022). The trigger: fresh fears over a widening fiscal hole and the political fallout that may follow.
At the heart of the selloff is a looming downgrade to the UK’s productivity outlook by the Office for Budget Responsibility (OBR). According to reports, the OBR is set to cut its trend productivity growth forecast by 0.3 percentage points — more than markets had anticipated. Based on Institute for Fiscal Studies estimates, that could add over £20bn to public borrowing by 2029–30, significantly deepening the fiscal gap.
Chancellor Rachel Reeves, already operating with just £9.9bn of headroom under her fiscal rules, now faces the prospect of finding an additional £25–30bn to balance the books. That’s before factoring in the £5bn cost of scrapping planned welfare cuts and growing pressure to lift the two-child benefit cap. While Reeves hopes that lower borrowing costs and stronger growth will soften the blow, speculation is mounting that income tax hikes may be on the table — a move that would breach Labour’s election pledges.
The gilt market is watching closely. Any sign that Reeves will lean too heavily on borrowing could spark a backlash reminiscent of the 2022 mini-Budget turmoil. Investors haven’t forgotten how quickly confidence can unravel when fiscal credibility is questioned.
For now, the pound is caught in the crossfire between fiscal reality and political constraint. With the OBR’s final pre-measures forecast due Friday and the Budget landing on November 26, volatility is likely to remain elevated. Sterling’s path from here hinges not just on the numbers — but on how convincingly the government can tell its story.
USD: A guaranteed rate cut, but what about QT?
Today’s FOMC meeting is poised to deliver a widely-expected interest rate cut, but it’s also shaping up to be a pivotal moment for the future of Quantitative Tightening (QT). After nearly three years of shrinking its balance sheet, the Fed may be ready to hit pause. Analysts and traders are watching closely to see whether the Fed will officially end QT now or wait until December. Either way, the signs are mounting that this chapter of monetary policy is nearing its conclusion.
QT began back in June 2022 as a way to unwind the massive balance sheet expansion that followed the COVID-19 crisis. Since then, the Fed has let over $2 trillion in bonds roll off, draining liquidity from the financial system. But lately, that drain has started to pinch. Short-term funding markets are flashing red: SOFR, the key secured borrowing rate, has occasionally spiked above the Interest on Reserve Balances (IORB) rate and the effective federal funds rate (EFFR), a classic stress signal that reserves are becoming scarce. Furthermore, banks have increasingly tapped the Fed’s Standing Repo Facility (SRF), a permanent liquidity backstop, at levels not seen outside of quarter-end periods since the pandemic.
These are red flags the Fed cannot ignore, creating the risk of a repeat of the 2019 repo crisis when overnight lending markets seized up. Fed Chair Jerome Powell recently hinted that reserves could reach “ample” levels in the coming months, which many took as an official signal that QT’s end is imminent. Meanwhile, a massive trade in SOFR futures suggests at least one big player is betting on a swift return of liquidity, something that would only happen if QT wraps up soon.
The Fed’s policy response could be two-pronged: ending QT addresses the quantity of reserves in the system, while trimming the SRF minimum bid rate addresses the price of that liquidity, ensuring money market rates stay firmly anchored to the central bank’s desired target range. This dual action might be necessary to stabilize funding markets and affirm the Fed’s control.
If QT ends, and especially if the Fed signals a future intention to grow its balance sheet to meet rising structural demand for cash (deposits and currency), it could give risk markets a meaningful boost. It’s crucial to note this is not a return to Quantitative Easing (QE), but a necessary technical adjustment to an ‘ample reserves’ operating framework. However, should the Fed signal a need for ‘bill purchases’ in early 2026, a move known as Balance Sheet Organic Growth, or even temporary operations like TOMOs (temporary open market operations) it would still serve as a powerful policy signal, similar to the impact of the temporary operations seen during the 2019 repo crisis.
EUR: Rally stalls as fundamentals fade
EUR/USD has climbed for five consecutive sessions, but the pair continues to struggle with technical resistance — failing to hold above its 21-day moving average, which remains in a downward slope. With the Fed expected to cut rates today and the ECB likely to stay on hold tomorrow, policy divergence is already priced in, leaving little fresh fuel for the euro’s advance.
The recent uptick in the euro is losing momentum, increasingly driven by its own softening fundamentals rather than any renewed dollar strength. Since July, the euro is still down about 1.1% against the dollar, despite the ECB’s steady rate stance, highlighting that the policy channel’s support for the euro has faded.
Positioning adds another layer of vulnerability. Speculative euro longs were near their highest levels since 2023 before the US government shutdown froze CFTC data releases. Without fresh sentiment gauges, funds may be more hesitant to extend exposure — especially with valuation flashing red. For example, on a real effective exchange-rate basis, the euro has overtaken the Swiss franc to become the most expensive G10 currency, sitting roughly 2% above its long-run average.
Macro fundamentals aren’t offering much support either. Euro-area GDP is expected to show another quarter of near-stagnation, while inflation continues to ease toward the ECB’s 2% target. Officials have repeatedly signalled that policy is “in a good place,” suggesting little appetite for further tightening — or loosening — in the near term.
Taken together, the euro’s strong rally earlier this year appears to have hit a natural ceiling. Crowded positioning, fading rate support, and stretched valuation all point to a more cautious outlook. With global risk sentiment still fragile and trade headwinds lingering, the balance of risks for the euro remains modestly tilted to the downside.
Pound sinks to oversold levels across the board
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: October 27-31
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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.
