Sterling climbs modestly with John Healey's 'beige Budget'

Healey’s Budget did no harm to sterling

That was all the pound could really hope for at a Budget with such little room to manoeuvre. The Chancellor’s debut saw a few measures to help consumers with the cost of living, and particularly with rising energy bills, but the bigger and tougher decisions were postponed. Still, markets were satisfied with the Budget’s modesty and sterling trickled higher ahead of and after the event. Gilt yields retraced too, although some of that followed the global trend rather than specifically being UK-driven. Nevertheless, GBPUSD climbed back to the 1.3400s and GBPEUR topped 1.2000 for the first time since spring 2025. The obvious question is can sterling build on those gains from here? If the UK’s economic growth trajectory can be maintained and the fiscal picture looks a little easier, then perhaps. It helps that the pound is higher-yielding too, although our economists still expect fewer rate increases than the market, hoping that a calming in geopolitics eases inflation concerns.

Midterm elections cause US policy uncertainty

The Democrats look to have secured a sweeping victory in the US’s midterm elections, taking full control of Congress with majorities in both the House and the Senate. That includes winning a Senate seat in Kansas for the first time in 94 years, in a clear showing of rebuke against the first two years of Trump’s second term. How the dollar is impacted from here will depend on the impact on policy. A key area of focus is AI, where now Democrat-led Texas could limit the data centre build, and Congress might look to enforce stricter regulation, which could have effects across all asset classes. A second key question however is how Trump handles the ‘lame duck’ label often attributed to Presidents without the support of Congress, and that he might use his veto powers to block Democrat policy, or even become an ‘angry duck’. The conflict in the Middle East and energy prices are the primary concerns on that front. The initial reaction to the midterms has seen a dollar weakening.

Notes: uses an equal-weighted index for each currency against the other nine in the G10
Sources: Investec, Macrobond, Bloomberg
As of 12:17 GMT, Wednesday 4 November

Christine Lagarde steps down early

The ECB President opted to remove herself from office slightly ahead of the scheduled departure date, justifying this by saying she no longer wanted to stay neutral on the political issues facing the world. Such neutrality is mandatory for an ECB President. That perhaps refers to geopolitical tensions, but also likely the situation in her native France. Premiums attached to French government debt remain elevated as social unrest continues and the fiscal position deteriorates. For now this is some way from becoming a systemic Eurozone event, but sentiment still weighs on the common currency. Our economists see that dampened sentiment continuing through into Q1 2027, and they have slightly downgraded their 2027 Eurozone GDP growth forecasts too given this and the energy headwinds. They expect a gradual recovery in the euro over the next 12 months as a whole though, once the political nervousness abates.

Elections cause huge BRL volatility

Indications after the election day on 4 Oct pointed to a win for Flávio Bolsonaro, but final results from the runoff vote on 25 Oct surprised with a win for the ruling Luiz Inácio Lula da Silva. That worried financial markets given the precarious fiscal position Brazil finds itself in, and as a result the real weakened significantly at the market’s open – USDBRL spiked more than 10% higher. Meanwhile back in G10 FX the Norwegian krone furthered its gains to now be up around 10% versus peers on average year-to-date, even as the SEK recovered some losses as the Swedish central bank, which had held off tightening so far, finally commenced its interest rate hiking cycle. Energy prices, economic growth and subsequent interest rate outlooks remain the key drivers in global FX markets, but global risk appetite could quickly take over. This month our economists noted that US corporate bond markets are showing some early signs of stress, and that theme is worth watching when looking at FX markets too.

Sources: Investec, Macrobond, Bloomberg
As of 14:17 GMT, Wednesday 4 November

Sources: Investec, Macrobond, Bloomberg
As of 12:17 GMT, Wednesday 4 November