Weekly FX Roundup: Pound Under Pressure, Euro Resilient, NFP data delayed
Lamera Capital
2025-10-03
The British pound wraps up a turbulent week under fiscal pressure. Political tensions are colliding with bond market scrutiny, while the euro holds firm on policy stability and the dollar navigates day two of the government shutdown that has suspended critical economic data, most notably today’s non-farm payrolls report. Sterling remains weak against the euro near major support levels, and has managed only modest gains against the dollar this week.
Fiscal credibility remains the pound’s Achilles heel. This week’s Labour Party conference in Liverpool exposed growing internal pressure on Chancellor Rachel Reeves to relax her “iron-clad” fiscal rules. While Reeves doubled down on economic responsibility in her keynote speech, activists disrupted proceedings and voices within the party continue to call for expanded borrowing, particularly for social housing and public investment.
Markets are watching nervously. Thirty-year gilt yields hit their highest levels since the late 1990s in September and, while slightly off those peaks, remain elevated with a noticeable premium to peers. The Office for Budget Responsibility is expected to flag a £27bn shortfall against fiscal rules, pointing to £35-40bn of tightening through tax rises or spending restraint in the upcoming November budget. Analysts expect new taxes to target property, banks, and non-wage income rather than employment.
The risks are asymmetric. Société Générale’s Kit Juckes warns of potential for EUR/GBP to reach 0.90 (around 1.11 in GBP/EUR terms) if the Bank of England cuts while the ECB stays on hold, a zone last seen during the Truss mini-Budget crisis. Options markets reflect this concern, with implied volatility elevated and GBP risk reversals skewed bearish. Unless fiscal headlines improve materially, the bias in GBP/EUR remains to the downside. For comprehensive analysis of sterling's structural challenges and fiscal risks, see our detailed pound outlook.
GBP/EUR trading in a flat range all week in the 1.14's but still holding onto that key support level.
GBP/USD - Rangebound, Fragile, and Waiting for Direction
EUR/USD - Stability Narrative Holds, Policy Divergence Intact
Sterling has remained around the lows of last week and any rally continues to meet resistance. Governor Bailey has reiterated that Bank Rate at 4% remains restrictive, reinforcing market expectations of cuts before year-end. Markets now price a November move as increasingly likely, with another possible by December, narrowing sterling’s yield advantage.
With Non Farm Payroll data cancelled by the US government shutdown, the dollar has lost its key guide. GBP/USD is likely to stay rangebound, with UK fiscal noise and BoE dovishness leaving the bias slightly lower ahead of November’s meeting.
The euro’s tone remains the steadiest of the majors. While both sterling and the dollar face domestic uncertainties, the euro benefits from policy predictability and moderate growth prospects. UniCredit maintains its medium-term projections of EUR/USD at 1.20 by Q4 2025 and 1.23 by Q4 2026, underpinned by moderate growth, fiscal support in Germany, and inflation converging near the ECB’s 2% target.
Policy stability is the anchor. With the ECB expected to hold rates steady through 2026, policy divergence with the Fed remains the main driver, particularly if the Fed continues its cutting cycle. For insights into ECB thinking and policy stability, see our analysis of central banking at a crossroads. ECB President Christine Lagarde reinforced this conservative stance last week, warning against regulatory rollback and calling for tighter oversight of non-banks. This contrasts sharply with U.S. deregulation discussions and underlines the ECB’s commitment to financial stability.
Near-term data remains mixed but stable. Eurozone PMIs show pockets of weakness in manufacturing, but services remain resilient. Producer prices are soft, but core inflation is behaving. With policy firmly on hold and no major catalysts on the immediate horizon, the euro stands out as the most stable of the majors.
The Week Ahead – Key Events and Risk Map
Fiscal credibility remains the pound’s Achilles heel. This week’s Labour Party conference in Liverpool exposed growing internal pressure on Chancellor Rachel Reeves to relax her “iron-clad” fiscal rules. While Reeves doubled down on economic responsibility in her keynote speech, activists disrupted proceedings and voices within the party continue to call for expanded borrowing, particularly for social housing and public investment.
Markets are watching nervously. Thirty-year gilt yields hit their highest levels since the late 1990s in September and, while slightly off those peaks, remain elevated with a noticeable premium to peers. The Office for Budget Responsibility is expected to flag a £27bn shortfall against fiscal rules, pointing to £35-40bn of tightening through tax rises or spending restraint in the upcoming November budget. Analysts expect new taxes to target property, banks, and non-wage income rather than employment.
The risks are asymmetric. Société Générale’s Kit Juckes warns of potential for EUR/GBP to reach 0.90 (around 1.11 in GBP/EUR terms) if the Bank of England cuts while the ECB stays on hold, a zone last seen during the Truss mini-Budget crisis. Options markets reflect this concern, with implied volatility elevated and GBP risk reversals skewed bearish. Unless fiscal headlines improve materially, the bias in GBP/EUR remains to the downside. For comprehensive analysis of sterling's structural challenges and fiscal risks, see our detailed pound outlook.
GBP/EUR trading in a flat range all week in the 1.14's but still holding onto that key support level.
GBP/USD - Rangebound, Fragile, and Waiting for Direction
EUR/USD - Stability Narrative Holds, Policy Divergence Intact
Sterling has remained around the lows of last week and any rally continues to meet resistance. Governor Bailey has reiterated that Bank Rate at 4% remains restrictive, reinforcing market expectations of cuts before year-end. Markets now price a November move as increasingly likely, with another possible by December, narrowing sterling’s yield advantage.
With Non Farm Payroll data cancelled by the US government shutdown, the dollar has lost its key guide. GBP/USD is likely to stay rangebound, with UK fiscal noise and BoE dovishness leaving the bias slightly lower ahead of November’s meeting.
The euro’s tone remains the steadiest of the majors. While both sterling and the dollar face domestic uncertainties, the euro benefits from policy predictability and moderate growth prospects. UniCredit maintains its medium-term projections of EUR/USD at 1.20 by Q4 2025 and 1.23 by Q4 2026, underpinned by moderate growth, fiscal support in Germany, and inflation converging near the ECB’s 2% target.
Policy stability is the anchor. With the ECB expected to hold rates steady through 2026, policy divergence with the Fed remains the main driver, particularly if the Fed continues its cutting cycle. For insights into ECB thinking and policy stability, see our analysis of central banking at a crossroads. ECB President Christine Lagarde reinforced this conservative stance last week, warning against regulatory rollback and calling for tighter oversight of non-banks. This contrasts sharply with U.S. deregulation discussions and underlines the ECB’s commitment to financial stability.
Near-term data remains mixed but stable. Eurozone PMIs show pockets of weakness in manufacturing, but services remain resilient. Producer prices are soft, but core inflation is behaving. With policy firmly on hold and no major catalysts on the immediate horizon, the euro stands out as the most stable of the majors.
The Week Ahead – Key Events and Risk Map
- UK: Budget speculation and fiscal messaging dominate. The OBR’s projections will be critical ahead of the November 26 budget. Elevated gilt yields keep the pound highly sensitive to fiscal signals.
- Bank of England: Next meeting November 6. Markets are increasingly pricing an earlier-than-expected cut, with Governor Bailey’s dovish tones reinforcing this view.
- Eurozone: Inflation data, ECB minutes, retail sales, and factory orders keep the data flow steady. Policy remains unchanged, providing a stable backdrop.
- United States: The shutdown continues with no resolution in sight. NFP is cancelled. ISM surveys, Fed minutes, and Fed speakers will fill the gap. CPI is also at risk of delay if the shutdown drags on.
For Corporates and Investors: Caution Is the Watchword
Volatility is likely to remain elevated through October. With UK fiscal credibility in question, the ECB steady but watchful, and the U.S. government partially blind due to the shutdown, the prudent approach is measured execution.
The smartest play in uncertain markets is not to outguess them, but to protect against them. For strategies to manage currency exposure during volatile periods, see our comprehensive forward contracts guide.