The British pound has strengthened against the dollar and the euro following a series of UK economic data releases that came in better than expected. According to Ebury analysts, the currency may maintain its positive momentum ahead of the autumn budget, which is expected to bring limited tax changes and avoid major turbulence in the bond market. At the same time, concerns are mounting over the state of French public finances, while the dollar is failing to regain its former strength despite geopolitical tensions and investors moving away from risk. The Polish złoty has also come under pressure, with the euro exchange rate rising above PLN 4.40.
Enrique Díaz Alvarez, Matthew Ryan and Roman Ziruk, analysts at Ebury, highlight a change in investor behaviour in the foreign exchange market. In previous periods, rising geopolitical tensions, falling share prices and higher oil prices typically favoured the dollar. This time, the market reaction has been different.
– During previous episodes of this kind, this combination of factors reliably strengthened the dollar. Meanwhile, the USD index fell for the second consecutive week, despite demand for safe assets supporting US Treasury bonds – Ebury analysts write.
In their view, the dollar is finding it increasingly difficult to use strong economic data to extend its gains. In recent weeks, the US currency has failed to make significant gains following a higher than expected inflation reading, strong economic activity data or deteriorating sentiment in equity markets.
– With so much good news already priced in and long positions now being unwound, we believe the dollar has reached a local peak – the experts say.
A week of central bank decisions and important data releases
The end of October brings a series of events that could influence the exchange rates of the major currencies. Investors are monitoring central bank decisions, inflation and economic growth data, and developments in the public finances of the United Kingdom and France.
The calendar includes meetings of the Federal Reserve, the European Central Bank and the Bank of Japan, as well as preliminary gross domestic product figures for the United States and the eurozone. Another factor will be the results of major US technology companies, including Microsoft and Alphabet, which could affect sentiment towards investments related to artificial intelligence.
According to Ebury analysts, the significance lies not only in the content of the published data but also in whether the figures match investor expectations. When some positive information has already been priced into assets, even strong economic results do not necessarily lead to an automatic appreciation of the relevant currency.
The złoty under pressure from expensive oil and problems in Europe
The Polish currency has come under pressure in recent days, much like other European currencies. The euro exchange rate has risen above PLN 4.40, reaching its highest level in approximately three years. In the view of Ebury analysts, the main factors are rising commodity prices and uncertainty surrounding France’s political and fiscal situation.
Market conditions have also deteriorated as a result of tensions in the Middle East. Reports of attacks on Iran and Saudi oil facilities have contributed to Brent crude prices rising to their highest levels in five months. More expensive oil could increase inflationary pressure and worsen conditions for economies dependent on energy commodity imports.
Ebury analysts note that domestic macroeconomic data have not fundamentally changed the outlook for the złoty. Greater attention has been drawn to producer price inflation (PPI), which rose from 4.8% to 6.1% in September, reaching its highest level in more than three years.
Rising prices at an earlier stage of the production chain may signal mounting cost pressures, although they do not automatically mean that consumer prices will increase by the same amount. It will be important to see whether businesses pass higher costs on to customers and how energy and other commodity prices develop.
In the coming days, investors will be watching Poland’s preliminary consumer price inflation (CPI) reading for October. According to Ebury analysts’ forecast, the rate should fall below 4%, partly under the influence of another phase of the CPN programme.
The euro is weakened by France’s public finance crisis
The euro was the weakest currency in the G10 group over the past week. The main source of concern has been France’s fiscal position, where budgetary problems are compounded by political uncertainty. Investors are paying increasing attention to the cost of financing French debt and the difference between French and German bond yields.
Ebury analysts point out that the spread between the yields on the two countries’ bonds has widened to levels last seen during the eurozone debt crisis in 2011. Meanwhile, the yield on French ten year government bonds has reached its highest level since 2002.
Rising government borrowing costs could put additional pressure on the French budget, particularly when the government must simultaneously address the need to reduce the deficit and sustain economic activity. Uncertainty surrounding public finances is also affecting business sentiment.
According to Ebury analysts, the weakness of the French economy is already visible in survey data. France’s composite Purchasing Managers’ Index (PMI) fell to 48.4 points, indicating a contraction in economic activity. The index for the eurozone as a whole declined to 51.9 points, its lowest level in four months and significantly below expectations.
Under these conditions, the European Central Bank must consider not only the inflation outlook but also the risks associated with financing member states. Ebury analysts expect interest rates to remain unchanged. However, they believe that comments by ECB President Christine Lagarde on the situation in France will be important.
If the central bank signals a willingness to support the bond market or places greater emphasis on the risks arising from France’s fiscal problems, investors may revise their expectations for future interest rate decisions. Such a reaction could put further pressure on the common currency.
The dollar no longer benefits so easily from strong data
The US economy continues to show signs of resilience, while some indicators suggest that inflationary pressures remain in place. The preliminary composite PMI for October edged down but remained close to a five year high. Particular attention was drawn to selling prices, which, according to Ebury analysts, rose at their fastest pace since 2022.
Such data could make it more difficult for the Federal Reserve to ease monetary policy quickly. Ebury analysts expect the Fed to leave interest rates unchanged, but believe its statement could contain signals about the possibility of an interest rate increase in December.
At the same time, the dollar is no longer responding as consistently to positive economic news. In the experts’ view, movements in equity markets are particularly important, especially in the artificial intelligence related segment.
– However, the dollar was influenced mainly by developments in equity markets, and an interesting pattern is emerging: limited fluctuations in AI related stocks leave the dollar vulnerable to declines, whereas during broader equity sell offs the US currency retains its status as one of the world’s most sought after safe haven assets – Ebury analysts note.
This means that the dollar’s performance may depend not only on macroeconomic data and Fed decisions but also on the scale of tensions in financial markets. When investors reduce risk across a broad range of assets, the US currency can still benefit from demand for safe assets. However, if a sell off is confined to selected market segments, that support may be considerably weaker.
The pound benefits from strong UK data
The British pound was the best performing major currency over the past week. It benefited from a series of data releases indicating that the UK economy was more resilient than market participants had expected.
The unemployment rate unexpectedly fell to 4.7%, its lowest level in more than a year. Growth in regular pay accelerated to 3.7%, while inflation rose to 3.5% in September, exceeding expectations. Measures of core inflation and services inflation also came in above forecasts.
Another sign of improvement was the preliminary composite PMI for October, which rose to 53.1 points, reaching its highest level in eight months. Businesses also reported increasing employment for the first time in two years.
The combination of stronger labour market data, persistent price pressures and improving economic activity indicators has raised expectations for the Bank of England’s monetary policy. Ebury analysts believe an interest rate increase in November is almost certain, provided the autumn budget does not trigger serious disruption in the bond market.
The budget will now be the most important test for the British currency. Investors will assess whether the government presents a credible public finance plan and whether the proposed changes increase uncertainty about economic growth.
The autumn budget could support the pound
According to Ebury analysts, the British government will probably seek to minimise surprises in the autumn budget. Tax increases remain likely, but they are expected to be targeted and relatively modest in order to limit their impact on the economic growth outlook.
– This time, unlike several recent autumn budgets, it appears that the Chancellor does not want to attract attention and will keep surprises to a minimum – the experts say.
They add: “Tax increases remain unavoidable, although they will probably be modest, targeted and limited to areas that are considered likely to have the smallest possible impact on the UK’s growth outlook.”
For the foreign exchange market, the credibility of the fiscal plan will be particularly important. If the proposed measures help improve the budgetary position without triggering a sharp rise in bond yields or concerns about the health of the economy, they could sustain demand for the British currency.
Ebury analysts note that “A modest package of measures restoring sound fiscal headroom would be well received by investors and could sustain demand for the pound this week.”
Sterling is therefore being influenced by two factors. On the one hand, it is supported by stronger economic data and rising expectations for interest rates. On the other, much will depend on whether the autumn budget increases concerns about the UK’s public finances and undermines investor confidence.
In the coming days, statements from central banks and inflation and economic growth data from the United States and the eurozone will also be important. These developments could change interest rate expectations and, in turn, affect the relative performance of the pound, the dollar and the euro.
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