Mildly bullish. Despite recent weakness from fiscal concerns and a hawkish Fed, Sterling may recover as oversold conditions and potential BoE resilience support a rebound. If upcoming PMIs stabilize and the BoE avoids signaling early cuts, Sterling could regain ground, especially if the Dollar rally fades as US data moderates. Medium term, a narrowing US–UK rate gap and eventual Fed easing should favor the Pound. Fiscal credibility concerns remain a risk, but near-term stabilization above 1.32 is possible, with scope toward 1.35 as sentiment improves and UK policy signals turn less dovish.

GBP: Bullish

The British Pound weakened sharply this week, pressured by growing domestic fiscal worries and the strength of a resurgent US Dollar. Sterling began the week stable but quickly lost ground as concern over the upcoming Autumn Budget intensified. Reports of a large gap in public finances and softer inflation data triggered a dovish shift in Bank of England expectations. The situation worsened midweek when the Fed’s hawkish turn sent GBP/USD plunging below 1.3300 and 1.3200 to its lowest level since April. The Pound also fell against the Euro, with EUR/GBP climbing to its highest level since May 2023, leaving Sterling near its weekly lows. Rising concern about the November budget was the main domestic drag.

A report from the Financial Times said the Office for Budget Responsibility is likely to cut its long-term productivity growth forecast, creating a potential £20 billion shortfall in public finances and limiting the Chancellor’s room for maneuver. Additional uncertainty came from speculation over tax policy, including reports of a possible 2p income tax rise and an early end to the windfall tax on oil and gas firms. Meanwhile, Chancellor Rachel Reeves faced political pressure over a housing rental scandal, adding to an already negative backdrop despite Prime Minister Starmer’s public support. Monetary policy expectations turned more dovish as inflation pressures eased. Data from the British Retail Consortium showed food inflation slowing to 3.7% in October, reinforcing the view that price pressures are cooling. In response, several analysts revised their forecasts.

Goldman Sachs now expects the BoE to cut rates by 25bps in November, and markets are pricing around 16bps of easing by year-end. Economic data had little influence on trading. The CBI Distributive Trades survey showed a small improvement, and mortgage approvals for September were stronger than expected, but neither offset the prevailing negative sentiment. The Pound’s losses were amplified by broad US Dollar strength following the Fed’s hawkish stance. Cross-currency pressure also added to the move, with EUR/GBP breaking above 0.8760 and trading around 0.88 for the first time in over two years. The dominant driver remained the widening policy gap between the BoE and the Fed, which left the Pound under sustained selling pressure throughout the week.

Sterling fell sharply this week as renewed US Dollar strength and growing UK fiscal concerns drove sustained selling. Early stability gave way to heavy losses once reports highlighted a widening budget gap ahead of the November fiscal statement, amplifying fears of tighter policy constraints and weaker growth. Softer inflation data reinforced dovish BoE expectations, while the Fed’s hawkish tone deepened the policy gap and pushed GBP/USD below 1.32. Cross flows added pressure, with EUR/GBP rising to its highest level in over two years as Sterling underperformed both the Euro and the Dollar.

Near term, mixed with a bearish tilt. Sterling’s path is shaped by conflicting forces. On the negative side, fiscal uncertainty, softening inflation, and expectations for near-term BoE easing continue to weigh on sentiment. Markets now price in modest cuts before year-end, while the Fed’s hawkish stance has strengthened the Dollar’s carry advantage. Yet short positioning and oversold conditions could produce temporary rebounds if this week’s key risk events like Monday’s Manufacturing PMI, Wednesday’s Services PMI, and Thursday’s BoE meeting, surprise positively. A steady or less dovish BoE message acknowledging lingering wage pressures could help Sterling stabilize, while any hint of an early easing signal or further downgrade in fiscal credibility would reinforce weakness.

Longer term, weak bearish. The structural story is still soft. The UK faces low productivity growth, constrained fiscal space, and a labor market that is losing momentum. These fundamentals leave the BoE closer to an easing cycle while the Fed and ECB maintain restrictive stances, narrowing the UK’s rate premium and reducing its appeal to global investors. Reeves’s fiscal tightening may eventually stabilize debt metrics, but near term it curbs growth and consumer confidence, limiting upside. Sterling is therefore likely to underperform until clearer signs of recovery in productivity or inflation stabilization emerge.

If upcoming data or BoE communication decisively flips the tone, for example, if the Bank signals a firmer hold stance or PMIs rebound sharply then the near-term bias could shift back toward neutral. Conversely, if fiscal headlines worsen or the BoE validates early easing bets, we will lean toward a weaker Pound until the data and market pricing improve.

USD: Short at rally

The US Dollar ended the week much stronger after a sharp hawkish shift from the Federal Reserve, which completely overshadowed positive developments in US-China trade relations. The DXY started the week trading in a narrow range below 99.00 as markets expected a 25bps rate cut and looked forward to the Trump-Xi meeting. The situation changed midweek when the Fed delivered the expected rate cut but Chair Powell’s press conference turned out far more hawkish than anticipated. He pushed back against the idea of another cut in December, leading traders to reprice expectations aggressively. The DXY jumped from a low of 98.62 before the announcement to a high of 99.84 by Friday, marking a volatile week dominated by a quick swing from anticipated easing to renewed confidence in tighter US monetary policy.

The Federal Reserve cut rates by 25bps to a range of 3.75–4.00% as expected, but the vote was divided. Governor Miran favored a larger 50bps cut, while Kansas City Fed President Schmid wanted to hold rates steady. The Fed also announced the end of its balance sheet contraction starting December 1st. During his press conference, Powell stated that a December cut was “far from assured” and highlighted differing opinions within the committee. He called the move a “risk management” step but hinted at a possible pause ahead, suggesting growing sentiment within the Fed to wait before acting again. This triggered a major shift in market pricing, with the probability of a December cut dropping from over 90% to around 65%. Later in the week, several Fed officials reinforced the hawkish stance. Schmid justified his dissent by pointing to continued economic strength and inflation pressures, while Fed members Logan and Hammack said they preferred to hold rates, further supporting the less-dovish outlook.

In global developments, the Trump-Xi summit eased trade tensions. The two leaders agreed to a one-year truce involving a US reduction of fentanyl-related tariffs and China’s pause on new rare earth export curbs, along with an agreement for China to purchase US soybeans. Elsewhere, the ceasefire in Gaza ended as Israel launched strikes in response to Hamas violations, and reports that the US planned attacks on Venezuelan military sites briefly created risk-off sentiment, though these reports were later denied.

Due to the ongoing US government shutdown, major data releases such as Non-Farm Payrolls were unavailable, putting the focus on smaller indicators and Fed commentary. The ADP estimate showed a job gain of 14,250 for the four weeks ending October 11th, indicating a labor market still strong enough to maintain employment levels. Consumer Confidence rose to 94.6, the Chicago PMI exceeded expectations, and Pending Home Sales were flat, missing forecasts of a 1.0% increase.

Market sentiment at the start of the week centered on optimism over trade talks, which supported risk-sensitive currencies and limited the dollar’s upside. However, sentiment shifted abruptly after the Fed meeting. Powell’s hawkish tone led to a dollar-driven rally supported by higher yields and widening rate differentials. The move reflected renewed confidence in the US economy and tighter policy expectations, even as the strong dollar weighed on equities toward the end of the week.

Near term, weak bullish. The near term driver is clearly domestic policy repricing. The Fed delivered a 25 basis point cut to 3.75 to 4.00 percent but Powell framed it as insurance and explicitly said a December cut is far from assured. That took the Dollar from a soft carry story back to a higher for longer story. Front end US yields moved up and the implied path of Fed easing for the rest of the year was priced out, which widened rate differentials against most peers and offered the Dollar broad support even as broader risk sentiment stayed constructive after the Trump Xi trade truce. Externally, improved trade tone and some easing in global tariff tension would normally encourage high beta currencies at the Dollar’s expense, but this time the hawkish shift from the Fed dominated and kept capital rotating toward US assets. Into next week, if ISM and labor data show that activity is still holding up and wages are not collapsing, the market is likely to keep treating the Fed as on pause and keep the Dollar bid. A meaningful dovish surprise from Powell or a sudden drop in US labor indicators that revives December cut bets would weaken this stance and take the bias down toward neutral. A renewed geopolitical shock that sparks full risk aversion could also add to Dollar strength given its reserve and safe haven role, but that is secondary to the rates story right now.

Longer term, weak bearish. The bigger picture has not fully changed. The Fed is still closer to an easing cycle than several peers and the committee is already split, with one voter wanting a larger 50 basis point cut and another wanting no cut at all. That tells you policy is already in late cycle risk management mode. US growth is still outperforming for now, but the fiscal mix, the shutdown overhang, and signs of softer housing and business investment point to slower momentum into year end. As the global backdrop stabilizes around a US China tariff truce and as other central banks eventually catch up to the Fed’s earlier tightening, relative rate support for the Dollar should erode. The Dollar also tends to underperform once the market believes that the peak in US real yields is in and that the policy path is gradually lower. That remains our medium horizon baseline. The path lower is unlikely to be linear though because the Dollar still benefits from safe haven flows whenever global credit or geopolitical stress flares.

If the narrative that drove the Dollar this week breaks down, the view can flip quickly. If incoming data or communication forces Powell to walk back the hawkish tone and guide clearly toward another cut in December, or if front end yields fall as markets rebuild aggressive easing expectations, then the Dollar would likely lose its current policy premium and slip back toward a weak bearish near term profile despite any ongoing trade calm. A sharp improvement in global risk appetite with stronger PMIs abroad, narrowing US rate differentials, and renewed demand for higher beta commodity and China linked currencies would have the same effect. In that scenario we would reconsider and lean toward a weaker Dollar until the data and market pricing improve.

GBP/USD 4H

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