US Dollar Eases Following Fed Rate Hold While Sterling Stabilises After UK Budget

The US dollar weakened on Wednesday after the Federal Reserve (Fed) left interest rates unchanged at 3.75%-4.00% in a 10-2 decision. Two policymakers supported a 25-basis-point rate hike, while the Fed upgraded its assessment of US economic activity from solid to strong. The dollar declined approximately 0.2% following the announcement as investors assessed Chair Kevin Warsh's comments and expectations for further tightening in December.

Meanwhile, Sterling stabilised after the UK Autumn Budget produced a relatively muted currency-market reaction. Finance Minister John Healey announced £15 billion in fiscal headroom for 2029-30, compared with £23.6 billion in March, alongside measures to reduce household energy costs. UK government bond yields edged lower, while GBP/USD recovered above 1.3300 later in the session, largely reflecting broader dollar weakness.

Separately, the Bank of Canada (BoC) increased its policy rate by 25 basis points to 2.50%, its first rate hike since 2023. Policymakers cited stronger economic activity and persistent inflation pressures, while the Canadian dollar strengthened following the decision.

The euro traded near 1.1145 against the dollar during early Thursday trading ahead of the European Central Bank (ECB) policy decision. Investors also awaited US economic growth and inflation figures, which could influence expectations for future Fed policy.

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GBP: Sterling Recovers as UK Budget Calms Bond Markets

GBP/USD: 1.3312 | EUR/GBP: 0.8364

Sterling recovered against the US dollar during Wednesday's session, with GBP/USD climbing towards 1.3312 after briefly falling near 1.3250, its lowest level since mid-October. The recovery coincided with dollar weakness following the Federal Reserve's (Fed) policy announcement rather than a direct response to the UK Budget. Against the euro, Sterling remained relatively stable, with EUR/GBP trading around 0.8364, close to its recent 17-month low.

The Office for Budget Responsibility (OBR) revised its UK inflation forecast for 2027 to an average of 3.4%, compared with its previous projection of 2%. Higher energy costs contributed to the revised outlook, while weaker growth expectations highlighted continuing economic challenges. The combination could complicate the Bank of England's (BoE) assessment of future interest-rate requirements, particularly if inflation remains elevated while economic activity slows.

Meanwhile, UK government bond yields edged lower following the Budget, indicating a relatively calm initial market response. However, elevated borrowing costs and uncertainty surrounding longer-term fiscal consolidation remained important considerations. Interest-rate markets continued to anticipate a 25-basis-point BoE rate hike on 5 November, potentially taking Bank Rate to 4.00%. Thursday's US inflation and growth figures could also influence GBP/USD through changes in Fed rate expectations.

Key technical reference levels for GBP/USD: Resistance sits near 1.3360, followed by 1.3390, while support sits around 1.3265, followed by 1.3255.

Key technical reference levels for EUR/GBP: Resistance sits near 0.8400, followed by 0.8450, while support sits around 0.8360, followed by 0.8355.

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EUR: Euro Faces Pressure as ECB Weighs Inflation and Bond Risks

EUR/USD: 1.1137

The euro recovered against the US dollar during Wednesday's session, with EUR/USD rising approximately 0.32% towards 1.1160 following the Federal Reserve's policy announcement. However, the pair surrendered some gains during early Thursday trading, stabilising near 1.1137 as investors assessed the European Central Bank's (ECB) forthcoming policy decision. Currency positioning remained cautious, with speculative short positions against the euro reaching their highest level in approximately a decade.

The ECB faces competing pressures from elevated inflation expectations and increasingly restrictive financial conditions. Higher energy prices have reinforced expectations of further interest-rate tightening, while rising government borrowing costs could constrain economic activity without additional policy increases. Interest-rate markets anticipated approximately three further quarter-percentage-point ECB rate hikes by the end of 2027, although the timing remained uncertain.

Meanwhile, French sovereign borrowing costs continued to complicate the ECB's policy assessment. The central bank was not expected to intervene directly in French bond markets at this stage, despite concerns about the widening yield premium over German government debt. Markets largely anticipated unchanged ECB rates on Thursday, with attention focused on President Christine Lagarde's assessment of inflation risks, financial stability and the possibility of a December rate hike.

Key technical reference levels for EUR/USD: Resistance sits near 1.1140, followed by 1.1200, while support sits around 1.1110, followed by 1.1095.

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USD: Dollar Eases as Treasury Yields Reflect Mixed Fed Expectations

DXY: 102.15

The US dollar surrendered part of its recent gains on Wednesday, with the US Dollar Index (DXY) declining approximately 0.2% to 102.15 following the Federal Reserve's (Fed) policy announcement. The index subsequently remained above 102.00 during early Thursday trading, although attempts to recover were limited as investors reassessed the outlook for US interest rates.

US Treasury markets reflected differing expectations across maturities. Shorter-term yields declined following Fed Chair Kevin Warsh's comments, while longer-term yields increased as investors assessed persistent inflation risks and government borrowing requirements. The widening gap between two-year and 10-year yields highlighted uncertainty about future monetary policy and the additional returns investors require for holding longer-dated government debt.

Interest-rate markets continued to indicate approximately an 85% probability of a December Fed rate hike, although expectations for further tightening in 2027 moderated. Elevated energy prices remained an inflation concern, while Thursday's third-quarter US Gross Domestic Product (GDP) and September Personal Consumption Expenditures (PCE) inflation releases could provide further evidence on economic growth and price pressures.

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Other Currencies: Australian and Canadian Dollars Advance as Policy Expectations Shift

AUD/USD: 0.7055 | NZD/USD: 0.5620 | USD/JPY: 157.76 | GBP/JPY: 210.20

The Australian dollar extended its gains during early Thursday trading, with AUD/USD reaching approximately 0.7055, supported by expectations of further Reserve Bank of Australia (RBA) tightening. Interest-rate markets increased the probability of a November rate hike to approximately 82%, compared with 62% before Wednesday's inflation release. The revised expectations reflected growing concerns about persistent domestic price pressures, with the RBA's next policy meeting scheduled for 3 November.

Meanwhile, the Canadian dollar strengthened following the Bank of Canada's (BoC) latest policy announcement, with USD/CAD declining towards 1.3975 during early Thursday trading. The central bank projected Canadian inflation of approximately 3.5% by the end of 2026 and an average of 3% in 2027, before returning towards its 2% target by mid-2028. Policymakers also indicated that further tightening could be necessary if energy-related price pressures spread more widely across the economy.

The New Zealand dollar remained subdued near 0.5620 against the US dollar, despite a modest improvement in domestic business confidence. October's ANZ Business Confidence reading increased to 52.5 from 51.9, while the Activity Outlook declined to 46.2 from 47.9, suggesting businesses remained optimistic but less confident about their own operations. Separately, USD/JPY traded near 157.76 as investors awaited Friday's Bank of Japan (BoJ) policy decision, with expectations of a possible December rate hike remaining relevant.

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Current Rate Table

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Market Lookahead

Thursday, Oct 29

• US GDP (Q3)
• ECB Interest Rate Decision
• US Initial Jobless Claims

Friday, Oct 30

• BoJ Interest Rate Decision
• Eurozone GDP (Q3)
• US PCE Price Index & Core PCE Price Index (Sep)

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