Weekly round up & the week ahead
Paul Reilly
Chief Commercial Officer
Weekly Currency Update
Sterling climbed to its strongest level against the euro since April last year, but Wednesday's UK Budget is the biggest test of that rally so far.
Week in review
Sterling was the standout against the euro. EUR/GBP broke below 0.84 for the first time since April last year, lifting GBP/EUR above 1.19. That is a clear break from most of this year, when the pair sat in a quiet 1.14 to 1.16 (0.86 to 0.88) range. The pound has been backed by a positive market reaction to the new Prime Minister, better-than-expected UK data and firming expectations of a Bank of England rate rise.
Euro weakness did much of the work. The French 10-year yield surged above 5%, its highest since 2002, and its spread over Germany widened to around 170bps, the most since November 2011. Worries over French public finances, domestic political tension and next spring's presidential election drove the sell-off. German regional election results and Spain's snap election added to the pressure, and EUR/USD fell to an 18-month low of 1.1114.
Elsewhere, the mood stayed cautious. Brent crude rose back above $110 a barrel on the Middle East conflict, keeping inflation and rate-rise risks in focus, while worries over AI valuations weighed on equities. The dollar was supported by a more hawkish Fed and safe-haven demand, and GBP/USD held around 1.337.
Week ahead
Wednesday's UK Budget is the key event for sterling. Chancellor Healy is expected to announce a series of small tax-raising measures to extend fuel duty freezes and rebuild fiscal headroom, which higher borrowing costs and inflation have squeezed. If tough spending decisions are pushed back to next year's Spring Statement, as has been hinted, the Budget may lack credibility.
That matters more because sterling has already rallied so far. With the pound at an 18-month high against the euro, a Budget that disappoints markets could see gilts sell off and those gains unwind quickly. The UK has fiscal vulnerabilities of its own, so further euro losses may be more modest from here. AIB forecasts EUR/GBP at 0.86 by year end, around 1.16 in GBP/EUR terms.
Central banks also take a turn. The Fed decides on Wednesday and is expected to hold at 3.75–4.00% after September's hike. The ECB follows on Thursday, expected to hold its deposit rate at 2.50%, with its comments on French yields closely watched. The Bank of Japan is likely to stay at 1.25% on Friday.
On the data front, Thursday brings US core PCE inflation for September, forecast at 3.1%, and the first reading of Q3 GDP, expected at 3.2% annualised. Friday's eurozone Q3 GDP, forecast at 0.2% q/q, and flash October inflation for France, Spain, Italy and Germany round off the week.
With the Budget testing sterling's gains and three central banks deciding on rates, now is a good time to review your exposures. Contact Clear Treasury for in-depth analysis, forecasts and a conversation about protecting your rates. Give us a call, email us, or request a call-back.