Sterling Sinks Against Euro & Dollar After Economy Records Second Month of Decline

Impact on GBP:

Pound declines amid economic contraction and negative sentiment

The Pound fell against the Euro and Dollar after the UK economy unexpectedly contracted in October, reflecting the impact of the government's messaging and budget.

The ONS reported GDP fell -0.1% in October, matching September’s decline and missing expectations of 0.1% growth. A 0.6% drop in production output, led by manufacturing, mining, and quarrying, was the main factor. The services sector, the largest in the economy, saw no growth for the second straight month.

“It’s concerning to see a further growth disappointment for the UK," says Anna Leach, Chief Economist at the Institute of Directors. "As we head further into the festive season, and consumer confidence remains in the doldrums, many businesses are continuing the process of updating their business plans for the coming year to accommodate significant increases in employment costs."

"The UK economy shrinks for the second month in a row which will be a big disappointment for Rachel Reeves. But she should not be surprised after talking the economy down through the summer and hitting businesses with a big tax grab in her autumn Budget!" says Andrew Sentance, former Bank of England MPC member.

Sterling fell, with GBP/EUR at €1.2085 and GBP/USD at $1.2637. Optimism for the Pound in 2025 remains, but risks of a deeper slowdown could shift expectations.

No Major Data

Impact on EUR:

EUR/USD steady as ECB avoids dovish tone despite downward rate trajectory

EUR/USD remained steady despite the European Central Bank's event risks yesterday, as President Christine Lagarde avoided sounding overly dovish. A slight weakening of the Euro emerged late in the session. However, as Carsten Brzeski highlights, the trajectory for Eurozone rates remains downward, with no guarantee they will stop at neutral levels (2.00-2.25%). Some attention has been drawn to the sell-off in Eurozone bond markets, particularly the widening Italian-German sovereign spread. Yet, this appears to reflect profit-taking or position adjustments rather than a belief that the ECB is unaware of the Eurozone's impending slowdown.

EUR/USD continues to hover around $1.0500, and expectation is it to remain anchored near that level today. The next key test for the Dollar will likely come with next Wednesday’s FOMC meeting, and it seems unlikely that those holding short EUR/USD positions—benefiting from positive carry—will feel compelled to adjust. A short-term range of $1.0450-$1.0550 may hold for now.

No Major Data

Impact on USD:

Dollar holds firm amid packed events week and resilient sentiment

It’s been a packed week for the events calendar, but the Dollar is wrapping up the week near the upper end of its range. US inflation data leaned slightly firmer than expected, although next week’s release of the core CPI deflator is anticipated to show a modest 0.2% month-on-month increase. Overall, there hasn’t been much adjustment in expectations for the Federal Reserve cycle this week, and we suspect next week’s FOMC meeting will have limited impact on the Dollar.

For Dollar bulls, it’s been a case of "so far, so good," as the typical December seasonal weakness has yet to weigh on the Dollar. Though most wouldn’t rule out the DXY breaking through resistance at 107.00 to 107.50 in what could be quiet markets.

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