Market Overview

Sterling starts the week on a firmer footing followingstronger UK growth data and rising expectations that the Bank of England mayneed to maintain a restrictive monetary policy. This week's inflation and labour market figures will be key in determining whether markets continue toprice in the possibility of a November rate increase.

The euro remains under pressure from concerns over French public finances and political uncertainty, while the US dollar continues to be driven by Treasury yields, inflation expectations and safe haven demand.

The main focus this week will be UK CPI and labour Market data, alongside flash PMIs across the UK, eurozone and US. These releases will help shape interest rate expectations ahead of the UK Budget on 28 October and the Federal Reserve's policy meeting on 27 to 28 October.

GBP: Sterling

Last week

Sterling outperformed the euro following stronger thanexpected UK growth data and renewed speculation that the Bank of England couldraise rates in November. Persistent inflation pressures have reinforcedexpectations that rates may need to remain higher for longer, although uncertainty surrounding the upcoming Budget remains a potential headwind.

Higher UK rate expectations can support sterling by improving the relative return on UK assets. However, this support will dependon whether incoming data justifies a more hawkish policy outlook.

Key events this week

• Tuesday:     UK labour market data. Wage growth will be particularly important, as     persistent pay pressures can feed into services inflation and make it harder for the BoE to meet its 2% inflation target. Strong earnings could support sterling, while rising unemployment or slowing wage growth would  weaken the case for further tightening.
• Wednesday:     UK CPI and public sector borrowing. CPI is likely to be the main     domestic market driver. An upside surprise could reinforce rate hike expectations and push gilt yields higher, supporting GBP. A softer reading could reduce those expectations. Borrowing figures will also be relevant ahead of the Budget, particularly in assessing the government's fiscal     flexibility.
• Friday:     Retail sales and flash PMIs. Retail sales will indicate the strength of household spending, while PMIs will provide insight into business activity, new orders and employment. Resilient readings would suggest the economy is holding up despite higher interest rates; weaker figures would raise concerns about slowing growth.
• BoE     commentary: Speeches from Megan Greene and Andrew Bailey will be watched for guidance on the balance between persistent inflation and weakening economic activity.

Outlook

Sterling retains a cautiously positive bias, particularlyagainst the euro. Strong wages and inflation alongside resilient activity wouldreinforce expectations of tighter monetary policy and could extend recentgains. However, weaker growth data may limit the benefit of elevated inflationif markets begin to focus on the economic cost of higher rates.

For EUR/GBP, stronger UK data relative to the eurozone wouldfavour a move lower, while weaker UK releases could allow the pair to recover.

EUR: Euro

Last week

The euro remained under pressure from concerns over French public finances and political uncertainty. Questions around France's deficit and fiscal outlook continue to weigh on investor confidence, while sterling's relative economic resilience and changing BoE rate expectations have added to the weakness in EUR/GBP.

Key events this week

• Tuesday:     German ZEW survey. The survey measures investor expectations for the     German economy. An improvement could support the euro by signalling stronger confidence, while a weaker reading would reinforce concerns about the region's growth outlook.
• Thursday:     Eurozone consumer confidence. This will provide an indication of household sentiment and the potential strength of domestic demand. Weak confidence could point to continued pressure on consumption, while an improvement would offer some support.
• Friday:     Flash manufacturing and services PMIs. These releases will provide an early indication of activity across the eurozone. Stronger readings,particularly in Germany, could ease concerns about stagnation. Continued weakness in new orders and employment would reinforce the view that economic momentum remains subdued.
• ECB     commentary: Investors will look for guidance on whether policymakers remain more concerned about inflation or the weakness in economic activity, as this will influence expectations for future rate decisions.

Outlook

The euro's near term outlook remains cautious, particularly against sterling. French fiscal concerns continue to weigh on sentiment, whileweak economic activity limits the scope for a sustained recovery.

Stronger PMI readings could provide some relief, but a more meaningful improvement would likely require evidence that economic momentum isrecovering and that fiscal uncertainty is easing. If UK data remains firm whileeurozone activity disappoints, EUR/GBP could face further downside.

USD: US dollar

Last week

The dollar lost some momentum towards the end of the week asTreasury yields eased. Lower yields reduce the relative return on dollar denominated assets and can weigh on the currency as markets reassessexpectations for Federal Reserve policy.

However, persistent inflation concerns and geopolitical uncertainty continue to provide support. The dollar may also benefit from safehaven demand if investors become more cautious about the global economic orpolitical outlook.

Key events this week

• Tuesday:     Housing starts and building permits. These figures will provide insight into residential construction and the impact of financing costs on the housing sector. Stronger data would suggest greater economic resilience, while weaker figures could indicate that restrictive financial conditions are weighing on activity.
• Thursday:     Initial jobless claims. Claims will provide a timely update on labour market conditions. Low or falling claims would support the view that employment remains resilient, while a sustained increase could raise expectations of further Fed easing.
• Friday:     Flash PMIs and University of Michigan sentiment. The PMIs will offer an early indication of business activity across manufacturing and services. The University of Michigan survey will also be important for consumer inflation expectations. Persistent inflation concerns could support yields and the dollar, while weaker activity would increase the risk of further losses.
• Fed     meeting, 27 to 28 October: Markets will begin positioning ahead of the decision, with incoming data influencing expectations for the timing and pace of any policy changes.

Outlook

The dollar's near term direction remains mixed. Strongeconomic data and persistent inflation could support Treasury yields and limit further weakness, while signs of slowing activity or a deteriorating labourmarket could increase expectations of monetary easing.

Geopolitical risks remain an additional factor, as safehaven demand can support the dollar even when domestic data is less favourable.Treasury yields will therefore be an important indicator of how marketsinterpret this week's releases.

Overall outlook

• GBP:     Cautiously positive. Strong inflation and wage growth could reinforce  expectations of tighter BoE policy, although weaker activity and Budget uncertainty remain risks.
• EUR:     Under pressure. French fiscal concerns and subdued economic momentum     continue to weigh on the currency. Stronger PMIs could provide some relief.
• USD:     Data dependent. Treasury yields and Fed expectations will remain key drivers, with resilient activity supporting the dollar and weaker data increasing the riskof further losses.

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