Currencies October 28, 2026 06:32 AM

Pound retreats as markets shift focus back to central banks; euro steady near annual lows

Easing AI sell-off fears and stronger dollar leave sterling pressured ahead of a key Fed decision and the UK budget

By Derek Hwang
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Sterling traded lower while the euro held near its weakest levels of the year as a firmer dollar and pre-Federal Reserve caution weighed on European currencies. Markets, having stepped back from an AI-driven equity sell-off, turned attention to inflation risks, energy costs and central bank responses. The Fed meets later in the day, the UK delivers its budget, and Canada sets rates, leaving policy developments central to near-term FX moves.

Pound retreats as markets shift focus back to central banks; euro steady near annual lows
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Key Points

  • Sterling fell 0.18% to $1.3283 and the euro eased to $1.1125 as of 06:17 ET amid dollar strength and Fed meeting caution.
  • Markets shifted focus from AI-related equity concerns to inflation and central bank policy after robust results from SK Hynix and firm tech futures.
  • The UK budget, the Fed decision, and ECB lending-survey signals are central to near-term moves in FX, gilts and corporate lending markets.

Sterling weakened on Wednesday while the euro remained close to its lowest levels of the year, pressured by a stronger dollar and investor caution ahead of a key Federal Reserve policy decision.

At 06:17 ET (10:17 GMT), the pound was 0.18% lower against the U.S. dollar at $1.3283, while the euro eased 0.01% to $1.1125.

Markets have recently moved away from acute concerns about an AI-driven equity decline, allowing investors to re-focus on forces that tend to support the dollar, including higher energy prices and the inflationary consequences of those moves. Strong third-quarter results from SK Hynix and resilience in tech indexes also contributed to the shift, with Nasdaq futures trading up about 0.6%.

"A little stability on the AI side has allowed the FX market to re-focus on the clearer and more present danger of higher energy, higher inflation and the central bank response," said Chris Turner, global head of markets at ING.

The dollar index was trading near yearly highs, around 102.35 according to HSBC data. Turner added that "a move through 102.50 opens up 103.00." That dynamic underlined the headwind facing major European currencies as investors awaited the Fed's policy conclusion later in the day.

Turner said he expects the Fed chair "will not want to tie himself in knots by citing a tightening in financial conditions," having "learnt from the unruly market response to his press conference in July." ING's view is that the drive to restore monetary stability will keep messaging tilted toward hawkishness and continue to support the dollar. The Bank of Canada is also scheduled to set rates, while Alphabet and Microsoft report earnings after the U.S. close.


U.K. fiscal backdrop

The United Kingdom is due to publish its budget later in the day. ING does not expect the budget to greatly alter the Bank of England's tightening path, though a surprise on minimum wage measures could prompt significant market reactions. ING rates strategist Michiel Tukker places about a 20 basis point risk premium on 10-year gilt yields, some of which could unwind depending on fiscal surprises. Turner noted the U.K. "looks to be one of the few G7 economies heading in the right fiscal direction into 2027."


Euro under strain

The euro remained under pressure from broad dollar strength and an unresolved French budget situation. The European Central Bank's lending survey indicated tighter credit conditions and an unexpected drop in corporate loan demand ahead of the ECB's press conference on Thursday.

Turner suggested it might be premature for the ECB to try to temper market expectations of tightening, noting that risks were building that direction. He highlighted the 1.1065/1.1110 area as "quite important support," and warned that slipping below that zone would have technical analysts looking at targets nearer 1.0880.

HSBC places euro support at 1.1066 and resistance at 1.1223. Euro/sterling is holding above 0.8350, a level Turner described as "looks heavy," with 0.8315 flagged as the next zone to watch.

ING sees EUR/USD vulnerable to testing 1.0880 if the identified support gives way. Turner observed that potential reasons for a euro bounce "are conspicuous by their absence." He noted that only a dovish turn from the ECB, an unexpectedly hawkish UK budget, or a Fed acknowledging tighter financial conditions would materially change that outlook. An LSEG consensus cited by HSBC projects EUR/USD at 1.14 and GBP/USD at 1.33 by end-2026.


Market implications

  • Currency markets are currently dominated by central bank considerations and the dollar's strength, with equity sector resilience from tech partially offsetting currency pressures.
  • Government bond yields and gilt pricing remain sensitive to both fiscal announcements and shifting risk premia tied to perceived fiscal trajectories.
  • Corporate loan demand and bank lending conditions are contributing to the euro's near-term vulnerability ahead of ECB communications.

Risks

  • The Federal Reserve's policy decision or commentary could reinforce dollar strength and pressure European currencies, affecting export-sensitive sectors and FX-exposed portfolios.
  • Unexpected elements in the UK budget - such as surprising minimum wage changes - could cause volatility in gilt yields and money markets, impacting fixed income and financial sectors.
  • Rising concerns over ECB-driven tightening expectations and falling corporate loan demand may weigh on the euro and financial-sector lending activity.

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