Sterling Holds Firm as UK Growth Outpaces Europe, but Economic Risks Mount

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Sterling has maintained its strength against other major currencies, but the UK economy faces growing questions over whether its recent run of growth can continue. Thursday’s GDP figures will offer a fresh indication of economic performance, with investors also keeping a close eye on employment trends and the wider financial outlook.

Across the Atlantic, US inflation figures take centre stage following a stronger than expected jobs report that helped revive the dollar. In Europe, attention is turning to the race to succeed ECB President Christine Lagarde, while renewed tensions in the Middle East have brought the prospect of higher energy prices back into focus.

For anyone buying property in France, transferring savings or making regular payments between the UK and France, the shifting economic picture could have a bearing on sterling to euro exchange rates in the days ahead.

Will inflation help or hurt the dollar’s payrolls rally?

The US payrolls data was far stronger than expected on Friday, which intensified the US dollar rebound after some perplexing moves in the immediate aftermath of the US midterm election results. However, in early trading in Asia and in the European morning session, the USD is handing some of its gains back, which appears to have little to do with fundamentals, politics or geopolitics.

The medium‑term outlook for the USD will be determined in part by what the US authorities are able to deliver in policy terms, which at the moment does not appear to be much, how they will deal with the rapidly approaching debt ceiling, and what, if anything, the administration can do to resolve geopolitical issues.

For the next few weeks though, the focus is likely to be on the US data, with this week seeing inflation numbers on the markets’ radar. Will the CPI figures show a further increase? That might prove challenging, since the Bureau of Labour Statistics is not set to publish the y/y figures for inflation, but the markets will be able to calculate them nonetheless. Later in the week, PPI inflation figures could see the headline figure further increase, but core inflation rates are likely to remain stable.

Will the UK growth story start to fade?

UK GDP figures have been a standout performer this year so far, and the provisional Q3 data is expected to report a 0.7% q/q growth rate when these figures are released on Thursday. However, that will not be the entire story, as there will be a breakdown of growth from a services, manufacturing and construction perspective for the month of September as well.

There are clear headwinds to activity for the UK, which might be seeing savings utilised more, in order to maintain living standards. The UK activity improvement is also yet to prompt any marked improvement in the UK labour market, with private sector employment and wage growth key drags on recent figures.

So why is GBP remaining so strong against other currencies? In short, there are bigger problems perceived for other economies and the UK is currently outperforming its counterparts across much of the Euro Area. Whether that persists remains in question, but the risks to GBP are mounting from fiscal and economic areas, in my opinion.

ECB successor debate intensifies as data takes a back seat

Even though the current President of the ECB, Christine Lagarde, is not due to leave until February 2027, the contest to replace her is already reaching fever pitch.

A number of comments from politicians and central bankers last week and over the weekend suggest that the race should be resolved before the end of the year, paving the way for a smooth transition. The two nominated candidates are former Dutch Central Bank head Klaas Knot, and former Bank of Spain Governor Pablo Hernández de Cos. Given that the Dutch have already had a head of the ECB, could that mean de Cos, who is strongly favoured by the Spanish, is the favourite?

Not necessarily. De Cos recently gave an interview focusing on the inflation risks facing the Euro Area, whereas Knot’s FT interview saw him arguing that he would not hesitate to act if there was another crisis in the Euro Area.

Neither of these comments make any difference to the performance of the euro, which continues to underperform other major currencies.

CAD faces fresh scrutiny as Mexico inflation data approaches

The CAD was negatively affected by the contrast between the weakness in its labour market data and the relative strength in the figures from the US last week. That prompted the CAD to lose more than 0.8% against the USD at one point on Friday, albeit the CAD has recovered somewhat over the weekend and in early trade this week.

Will the CAD come under fresh pressure? Possibly, given that there is little due for release from Canada this week, so all the focus is likely to be on US data that could place additional pressure on the Fed to hike in December. USDCAD is likely to test both higher and lower this week, fluctuating between recent lows and recent highs over the course of the week, in my view.

As for the Mexican peso, it could come under fresh pressure if the trend in CPI inflation seen recently continues. Mexican inflation rates have been easing back of late, one reason why the central bank reduced interest rates last week. If there is another dip in headline and/or core CPI inflation, then the risks are for further MXN weakness, in my opinion.

Riyadh strike clouds Middle East ceasefire hopes

According to US officials, mediated talks between the US and Iran over a ceasefire made no progress over the course of the weekend, and there has potentially been a setback after Houthis in Yemen fired missiles at the Saudi capital Riyadh, striking a building in the financial district that houses offices of the state oil company Aramco.

This action has been downplayed by US officials, but it will increase Saudi resolve to intensify action against the Iranian‑backed Houthis. This could further increase travel restrictions to the region.

So far there has been limited reaction in financial and commodity markets, but the risks of a renewed rise in energy prices remain present.