Weekly FX Roundup: Policy Divergence Is Reasserting Itself Across GBP, EUR, USD & JPY

Foreign exchange markets have undergone a meaningful repricing over the past week as a dense run of central bank decisions, economic data and policy commentary reshaped expectations heading into year-end. What has emerged is a clearer picture of divergence, both in growth momentum and in the direction of monetary policy, and currencies are now beginning to reflect those differences more honestly. 

Liquidity conditions remain broadly supportive of risk assets, but the easy narrative of synchronised easing is fading. Instead, markets are increasingly focused on where policy paths separate in 2026, and which economies are entering that period from positions of relative strength or fragility. 

Sterling’s performance over the past week has been shaped less by global sentiment and more by a steady deterioration in domestic fundamentals. UK data releases have confirmed that the economy is losing momentum, with GDP contracting again in October and rolling growth measures turning negative. Labour market figures have reinforced this picture, showing rising unemployment and weakening employment trends, particularly among younger workers. 

Inflation has continued to ease, falling more sharply than expected, and survey-based measures of inflation expectations have also edged lower across all time horizons. For the Bank of England, this combination is decisive. Slowing growth, a softening labour market and improving inflation dynamics have given policymakers confidence to cut interest rates again, while also reopening the debate about how far rates may need to fall in 2026. 

The rate cut delivered this week was expected, but the narrow split on the Monetary Policy Committee and the tone of the accompanying guidance mattered. While the Bank stopped short of committing to an aggressive easing cycle, it made clear that further cuts would depend on how quickly economic slack builds. Markets have responded by maintaining expectations for additional easing next year, even if the pace is likely to be gradual. 

For sterling, this leaves a difficult backdrop. While risk sentiment and global liquidity have provided intermittent support, the pound is increasingly trading as a reflection of domestic weakness. Against currencies backed by steadier growth or firmer policy outlooks, sterling remains vulnerable. 
 

In contrast, the euro has quietly benefited from relative stability. Eurozone data this week showed business activity holding up better than feared, particularly in services, reinforcing the view that the region is navigating a shallow slowdown rather than a sharp downturn. Manufacturing remains subdued, but the broader picture has been resilient enough to justify the European Central Bank’s decision to remain on hold. 

The ECB’s message has been deliberately balanced. While some policymakers had previously floated the idea that the next move could eventually be a rate hike, President Lagarde pushed back against that interpretation, emphasising optionality and data dependence. Crucially, however, the ECB has not reopened the door to near-term cuts. 

This matters in a world where other major central banks are easing. The euro’s recent strength has been driven less by optimism about European growth and more by policy divergence. As US and UK rates move lower, the euro benefits from the absence of immediate easing pressure. That relative steadiness has made it one of the better-performing G10 currencies in recent weeks. 
 

The US dollar’s decline has continued as markets reassess the Federal Reserve’s reaction function. This week’s Fed decision delivered a third rate cut of the year and, more importantly, did little to challenge expectations for further easing in 2026. While policymakers remain divided, Chair Powell acknowledged growing downside risks to the labour market and appeared comfortable with the idea that inflation is now broadly under control. 

Subsequent data reinforced that narrative. Employment indicators and retail sales pointed to slowing momentum, while inflation surprised to the downside. Treasury yields fell in response, and the dollar’s yield advantage narrowed further. At the same time, expectations of a leadership change at the Fed have added another layer of uncertainty, with markets increasingly pricing a more dovish tilt over the medium term. 

The result is a dollar that is losing structural support. While short-term rebounds remain possible on data surprises, the broader trend is one of gradual depreciation as capital rotates toward higher-beta and policy-stable  

Japan provided one of the more interesting developments of the week. The Bank of Japan raised interest rates again, taking policy to its highest level in decades. On paper, this marked another step away from ultra-loose policy and should have supported the yen. 

In practice, the currency weakened. 

Markets had fully anticipated the move, and the accompanying communication failed to convince investors that further tightening is imminent. Governor Ueda remained vague on timing and pace, reinforcing the perception that while the direction of travel is higher, the slope is shallow. With global yields still elevated and carry dynamics intact, the yen struggled to attract sustained demand. 

That leaves the Japanese currency in a familiar position. Policy normalisation is real, but credibility around follow-through remains limited. Until the BOJ signals a clearer commitment to further hikes, the yen is likely to remain volatile and reactive rather than trend-defining. 

Taken together, this week’s developments have clarified the current FX landscape. The pound is being weighed down by domestic weakness and rising expectations of further easing. The euro is benefiting from relative policy stability rather than outright strength. The dollar is adjusting to a world of lower yields and softer data. And the yen, despite policy action, continues to suffer from uncertainty over the future path of rates. 

For corporates, investors and treasurers, the message is increasingly about structure rather than timing. The era of uniform central bank behaviour is over, and currency moves are becoming more closely tied to underlying economic resilience and policy credibility. 

This is the environment FX markets are now trading in.