FX outlook October 6th 2025: UK fiscal risks grow, the euro holds & the dollar drifts

The pound started the week with early strength but could not sustain momentum. GBP/EUR pushed toward 1.15 this morning before fading, capped below the 21-day moving average at 1.1490. Analysts keep the same message: sell rallies. Not because sterling is collapsing, but because the path of least resistance still points lower. 

The UK’s 26 November Budget is now the dominant market driver. The Office for Budget Responsibility has warned of weaker productivity, higher social spending, and mounting debt costs. Markets expect tax rises but fear they will slow growth further in an economy already under strain. 

Services data has softened, inflation remains sticky at 3.5% (the second highest in the G7), and traders are pricing in early Bank of England rate cuts. That combination continues to undermine confidence. If the BoE cuts before the ECB, Société Générale warns GBP/EUR could slide to 1.11, a level last seen during the 2022 Truss crisis. Rabobank’s three-month forecast of 1.1365 reflects a similar caution. 

Support near 1.1450 looks fragile. Until the Budget restores fiscal credibility, rallies are likely to fade. 

The euro’s strength is relative, not absolute. September CPI rose to 2.2%, the highest since April, confirming that the ECB has paused its rate-cutting cycle. President Lagarde reinforced this stance last week, calling for stronger oversight of non-banks and warning against relaxing regulation too soon. For insights into ECB thinking and central banking policy, see our analysis of central banking at a crossroads.

Eurozone data supports this sense of stability. The services PMI reached an eight-month high at 51.3, while composite output rose to a 16-month peak. Geopolitical tension, including reports of drone incursions across northern Europe, has capped gains, but the euro remains supported by steady inflation and credible policy. 

In the United States, the government shutdown has suspended key economic releases, including non-farm payrolls. ISM surveys have delivered mixed signals, showing manufacturing weakness alongside rising services prices. The overall picture is one of stagnation rather than contraction. 

Markets are now waiting for Wednesday’s FOMC minutes and a busy week of Fed speeches to provide direction. With one more rate cut priced in before year-end, EUR/USD continues to hover around 1.1700. 

GBP/EUR remains capped around 1.1490, with resistance at 1.1535 and 1.1560. Support sits near 1.1425. Momentum indicators suggest limited appetite for aggressive positioning ahead of fiscal clarity. 

Markets appear calm on the surface but remain uneasy underneath. The dollar lacks conviction without data, the euro is steady but limited by weak growth, and sterling continues to walk a fiscal tightrope. 

For businesses and investors, disciplined execution is key. Layer hedges, avoid chasing levels, and stay alert to sudden changes in policy or sentiment. Until the UK delivers a credible Budget and inflation begins to ease, sterling rallies are likely to fade quickly. For strategies to protect against currency volatility, see our comprehensive forward contracts guide.