Defensive sterling meets fragile eurozone as Fed eyes rate cut: Sterling Update

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GBP

It’s a relatively quiet week for UK economic data, but fiscal policy remains in focus as the government prepares for the Autumn Budget.

Markets are watching closely for any signals around spending plans, borrowing levels, and the broader fiscal trajectory. While no major releases are scheduled, sterling continues to trade defensively, weighed down by concerns over sluggish growth and mounting public sector pressures.

Governor Andrew Bailey is due to speak this evening (Monday). While no immediate policy shifts are expected, his remarks may offer insight into the Bank of England’s thinking as it navigates a divided Monetary Policy Committee and a fragile economic backdrop.

With the euro under pressure from political instability, GBPEUR could benefit from relative calm in the UK – though any surprises in budget planning could quickly shift sentiment.

EUR 

The resignation of French Prime Minister Sébastien Lecornu has introduced a fresh layer of uncertainty into eurozone politics.

Lecornu stepped down just weeks after appointing his cabinet and ahead of submitting the 2026 Budget, citing his refusal to invoke Article 49.3 of the French Constitution to bypass parliamentary approval. His departure raises the risk of prolonged political instability, with speculation mounting around potential snap elections.

This instability threatens to undermine business confidence and investment in France, and has already triggered a spike in French bond yields, which are now trading above Greek equivalents. The broader eurozone political landscape remains fragile, with the far-right AfD party leading polls in Germany, Spain’s socialist workers party, the PSOE, trailing the conservative People’s Party, and Dutch elections later this month expected to result in complex coalition negotiations.

Despite briefly breaking above €1.15 this morning, the euro remains vulnerable. If political risks in France amplify broader eurozone concerns, GBPEUR could push through and test over €1.16 in the near term. With President Macron facing a deeply polarised parliament, it’s unclear how any incoming prime minister can deliver his agenda of spending restraint, tax increases, and deficit reduction.

USD 

US economic data remains largely postponed as the government shutdown heads into its second week. A vote to break the deadlock is expected today, but if it fails, the next opportunity for resolution won’t come until at least Wednesday. The longer the impasse continues, the longer the delay to key releases, leaving the Federal Reserve with limited visibility ahead of its next policy meeting.

In the absence of fresh data, market attention turns to Fed commentary. A full slate of speakers is scheduled this week, beginning with Kansas City Fed President Schmid, a voting member, on Monday evening. Tuesday brings remarks from Atlanta Fed President Bostic (non-voter), Governor Bowman, Governor Miran (twice), and Minneapolis Fed President Kashkari (alternate).

On Wednesday, Governor Barr will speak twice, alongside Kashkari. Thursday is the most active day, with Chair Jerome Powell delivering a key address, followed by additional appearances from Bowman, Kashkari, and Barr. No Fed speakers are scheduled for Friday.

With a 25bp rate cut at the October 29 FOMC meeting now seen as a near-certainty – Bloomberg data shows market pricing above 90% – investors will be listening closely for the Fed’s assessment of current risks to growth and inflation.

While rate cuts are typically dollar-negative, the impact may be more muted this time. Much of the easing is already priced in, and short-term downside risks to the euro, particularly following the French Prime Minister’s resignation, have helped limit dollar softness.