Sterling traded a touch weaker on Thursday, mirroring a small decline in the euro, as the U.S. dollar held its recent gains after markets showed little reaction to the Federal Reserve's policy hold. At 07:07 ET (11:07 GMT), the pound was down 0.03% versus the dollar at $1.3325 and the euro was 0.08% lower at $1.1149.
The British government's Budget, delivered by Chancellor John Healey, kept the public finances on a path of improvement and gave only limited fiscal stimulus. The Office for Budget Responsibility projected a deficit of 3.4% of GDP for 2027. James Smith, UK economist at ING, said those figures were unlikely to alter the Bank of England's stance, noting that the Budget did not add "fuel to the fire." Smith added that the BoE appears set to raise interest rates next week, with a further increase possible in February, and that ING views a 2027 general election as becoming more probable.
Across the Atlantic, the dollar softened somewhat in the aftermath of the Fed decision, with the two-year USD swap rate falling by about 8 basis points. Yet ING cautioned that the move may not have much further to run. "We see limited room for bearish follow-through to yesterday's mild negative USD reaction on the Fed story alone," said Francesco Pesole, FX strategist at ING, arguing that a consolidation of the dollar's recent gains is more likely.
Pesole described the Fed's overall message as hawkish, citing Chair Warsh's comments that inflation "remains elevated" and that the economy is "expanding at a strong pace." He also noted that policymakers Beth Hammack and Lisa Cook dissented in favor of a rate hike.
Market pricing currently implies 21 basis points of tightening by December. Attention has turned to U.S. released data for direction: today's core PCE inflation for September is forecast at 0.3% month-on-month, matching consensus, and third-quarter GDP is forecast at a 3.4% annualised pace versus a 3.2% consensus. Pesole said ING expects a modest positive dollar reaction if the figures arrive as forecast.
In Europe, the European Central Bank is expected to hold rates at its meeting. Pesole said he did not think recent turbulence in the French bond market would be sufficient to prompt a pronounced dovish shift by the ECB, particularly given elevated energy costs. Natural gas prices reached 100/MWh on Wednesday.
Regarding ECB forward guidance, Pesole suggested a signal that a December rate increase is "likely" would amount to a modest hawkish surprise, while a more cautious wording such as "possible" or "in play" would be consistent with a less definitive stance.
On currency technicals, Pesole observed that EUR/USD has not yet demonstrated an ability to break below 1.110 and that he does not expect the ECB event to trigger a substantial downward leg for the euro. HSBC has placed EUR/USD support at 1.1086 and resistance at 1.1244, and GBP/USD support at 1.3165 with resistance at 1.3451. ING's notes did not provide explicit EUR/USD or GBP/USD targets.
Consensus forecasts compiled by LSEG, and cited by HSBC, place EUR/USD at 1.14 and GBP/USD at 1.33 in the fourth quarter, rising to 1.15 and 1.34 respectively in the first quarter of 2027.
Pesole noted conditions that would prompt a reassessment of ING's base view: a significantly more hawkish ECB or disappointing U.S. data could alter expectations. He also highlighted potential market risks including a fall in oil prices and positioning bets for a softer dollar ahead of next week's U.S. midterms.
Market snapshot
- GBP/USD: down 0.03% at $1.3325 (07:07 ET / 11:07 GMT)
- EUR/USD: down 0.08% at $1.1149 (07:07 ET / 11:07 GMT)
- Two-year USD swap rate: fell about 8 basis points after the Fed decision
- Market-implied tightening: 21 basis points priced by December
- Energy: Natural gas reached 100/MWh on Wednesday
Context for traders and markets
Investors are parsing incoming U.S. inflation and growth data for confirmation of the Fed's hawkish tilt, while UK fiscal policy and ECB communication are being monitored for any shifts that could influence short-term rate expectations and currency positioning.